Henkel AG & Co. KGaA
Q3 2021 Earnings Call Transcript

Published: 8 Nov 2021

[Operator:]

Good morning, and welcome to the Henkel Q3 2021 Conference Call. With us today are Carsten Knobel, CEO; Marco Swoboda, CFO; and the Investor Relations Team. For the duration of the call, you will be on listen-only. Please note that there will be a live webcast of today's conference call, including the Q&A session. In addition, a replay of the conference call and the Q&A session will be available on our website www.henkel.com/ir for a certain period of time. By asking a question during the Q&A session, you agree to both the live broadcasting, as well as the recording of your question, including salutation to be published on our website. Here, we will briefly mention your name and the company you are representing. At this time, I'd like to turn the call over to Mr. Knobel. Please go ahead, sir.

[Carsten Knobel:]

Dear Investors and Analysts, good morning from Dusseldorf, and a warm welcome to our conference call on the result for the third quarter of 2021. I'm here with our CFO Marco Swoboda. Thanks for joining us today. Let me remind everyone that this presentation containing the usual form of disclaimer or forward looking statements within the meaning of relevant U.S. legislations can be accessed via our website henkel.com/ir. The presentation and discussion are conducted subject to this disclaimer. I will not read this disclaimer, we take it as read into the record of this conference call. Our agenda today will focus on the key developments and our business performance of the third quarter of this year. I will start with the full picture, hand over then to Marco, who will comment, the business performance in more detail, before I will close with the full year outlook and Henkel’s priorities for the remainder of this year. We are looking forward to taking your questions then at the end. Let's first have a look at the key developments. In the third quarter, Henkel sustained its growth path with a strong organic sales growth of 3.5% on Group level driven by pricing. In nominal terms, sales increased by 1.9% to a level now of about €5.1 billion. Growth in the third quarter was supported by a very strong performance of Adhesive Technologies, which delivered organic sales growth of 7% against a positive prior year quarter. Laundry & Home Care achieved good organic sales growth of 2%, thanks to strong performance in Laundry Care and despite a very high comparable at of almost 8% in Q3 of 2020. Beauty Care remained below the prior year at minus 3%. The further recovery of the Professional business could not fully compensate the decline in Consumer. Here, the performance continued to be affected by significant market headwinds in the Body Care segment, particularly in Soaps. Also, over the two year period, Henkel achieved a strong performance with a compound annual organic growth in the third quarter at the higher end of our mid-to-long term ambition of 2% to 4% organic sales growth. We performed well in a volatile and highly demanding environment. We continue to see headwinds from extremely tight supply markets and significant input cost inflation, which intensified further in the past months. We are reflecting this in our financial outlook for the full year, which we are updating today. Based on our strong sales performance year-to-date, we expect to close the year well within the guidance range of 6% to 8% organic sales growth. At the same time, due to the stronger input cost headwinds, we are now expecting the earnings KPI to come in at the lower end of the prior year guidance ranges. To be more precise, we expect an adjusted EBIT margin of around 13.5% and adjusted EPS to increase by a high single-digit percentage at constant currencies. While managing our performance in a highly challenging environment, we executed important initiatives to drive our perpetual growth agenda with full speed. Today, I will focus in particular, on the progress we made in the area of competitive edge. So let's have a closer look at our two years growth dynamics. Compared to the third quarter of 2019, we achieved a strong compound annual growth rate in organic sales of 3.7%. Importantly, for the first time, each of our three business units exceeded its respective pre-COVID levels in organic terms. And year-to-date, our organic sales increase is of 8.6%, which translates in an annual growth rate of 3.1% over the two years period. A compelling performance, thanks to our robust, diversified portfolio, with strong brands and technologies, successful innovations for our customers and consumers, particularly in the field of sustainability and the expansion of digital. Facing a persistently challenging business environment, I'm particularly proud of the great commitment and the strong dedication of every single Henkel arm. The economic activity continued to recover in the third quarter. But as expected, growth rates were slowing compared to a very dynamic first half year and against a stronger prior year baseline. Industrial demand improved further, with a mixed picture across different industries and headwinds from global supply shortages. Consumer behavior is still impacted by the pandemic. But demand continued to normalize, particularly significantly, and with varying dynamics across categories. And finally, the scarcity in raw materials supply and logistics with sharp and broad-based cost inflation further intensified in the course of the third quarter. And here, let me provide you with some more details. Industrial production continued its recovery, but growth was gradually slowing after an exceptionally strong Q2. This was mainly due to the higher prior year comparable basis and stronger than anticipated headwinds in the automotive sector. Accordingly, the Industrial Production Index advanced by about 6% year-over-year in the third quarter, after an increase of almost 18% in Q2. From a regional point of view, the growth profile was broad-based. Industrial demand expanded in all regions by a low single-digit to mid single-digit percentage. The picture by segments is a bit more differentiated. Most markets relevant for our Adhesive Technologies business recorded a sustained recovery. General Manufacturing & Maintenance benefited from a robust demand after the recovery, only gradually picked up throughout the second half, last year. This is also true for the Industrial business. The market for Packaging, Lifestyle, and Electronics continued the growth momentum. In contrast, the automotive sector turned significantly negative in Q3. Global production volumes declined by a double digit percentage, mainly as a result of the ongoing semiconductor shortage. Moving to the Consumer categories, and here we are seeing varying dynamics. Pandemic-related restrictions are still in place in most countries and more recently, infection rates were on the rise again. With vaccination rates at the high level in many regions and further rising, consumer behavior and demand patterns continue to normalize in the third quarter. Demand continue to decline against elevated prior year levels in most categories that have benefited from a strong focus on hygiene and from stay-at-home effects during the pandemic. This includes Hard Surface Cleaners, as well as at Home Colorations and in particular, Soaps. That recorded double-digit market decline. The category continued to be significantly affected by the strong unwind of peak demand levels, especially in our key markets, Western Europe and North America. On a positive note, the Hair Salon market continued its recovery despite the less impacted prior year basis with more salons back in operations. Demand for Hair Styling products sustained its rebound after it had just turned positive in the course of Q2. And finally, the Heavy Duty Detergents and Automatic Washing markets also showed a positive development compared to the prior year level. Supply chain headwinds are intensifying. Demand remains high across industries and consumer categories, but it meets very tight supply and logistic markets. This imbalance has been further deteriorating in the past months, not least due to container and labor shortages, as well as weather related disruptions, such as the devastation from Hurricane Ida in August. So, what have we been seeing in the markets in the third quarter? Prices for raw materials increased further from already high levels. Some input materials reach price levels not seen in 10 years. Logistic costs were also up reflected by further increases of global container freight rates and increased truckload prices. This resulted in higher average shipment costs, specifically, in the North American market, and supply shortages are increasingly affecting economic activity with a lasting effect. Light vehicle forecast for the full year has been cut by 10%, equal to more than 8 million cars globally. As a result of these accelerating trends, we are now expecting prices for direct materials to increase by a low to mid-teens percentage this year, implying further cost pressure in the second half of the year. This compares to our previous expectation of a low-teens percentage increase per August. We continue to work hard to limit the impact on our profitability with additional savings in the supply chain as well as pricing initiatives, where possible, which will materialize with a certain time length. In this demanding environment, we maintain our strong focus on our strategic priorities and we are executing our purposeful growth agenda with full force. This year, we put special emphasis on two areas. First, further expanding competitive edge across our businesses through innovation, sustainability and digitalization and second, shaping a collaborative culture with empowered people making cultural change tangible for our people. On our call today, I would like to focus on our further progress with regard to our competitive edge. Of course, we will report in detail on our strategic initiatives and our full year results released in February. In Adhesive Technologies, the teams continued to expand our competitive edge through continuous innovation and a strong focus on sustainable solutions. Let me stress some highlights here. We further strengthened our contribution towards a circular economy in the automotive industry with our new debondable hotmelt that enables cost efficient repair of individual LED panels in the latest generation of LED headlamps. Until now, you had to change the complete car headlamp in case of a malfunction. We also developed color-matched adhesive for seamless designs in the fast growing market of mobile phones and wearable devices. With our solution, we don't only enable attractive product design, but also ensure superior water proving and drop performance. And we introduced a new solution that facilitates the sustainable paperboard packaging in the beverage can industry. This innovative packaging solution has a lower carbon footprint than its alternatives, reducing the CO2 equivalent by around 50%. The applied solution from our Technomelt range also has best-in-class recyclability properties. Moving to Beauty Care. In Beauty Care, the teams fueled the continued reopening of hair salons with impactful innovations leading to strong growth in Professional in the third quarter. Our IGORA Royal brand, which we had relaunched with a full redesigned sustainable packaging concept was an over proportionate growth driver. In Beauty Care Consumer, we recorded an overall negative organic sales development. Markets remain challenging with continued weakness in the Body Care category after an already difficult Q2. Nevertheless, we further expanded our competitive edge also in Consumer. We increased market share in Hair Cosmetics. Share gains was supported by new launches and our coloration brands Palette and Syoss as well as under our styling brand got2b. And we further developed our nature brands. We broadened our Nature Box offering by extending our sustainable solid range, now also into the field of conditioners and by launching highly concentrated intense hair treatment. In Laundry & Home Care, we sustained our innovation leadership evidenced by market share gains across all regions with the exception of North America. We once again outgrew our markets in the important cap segment and expanded global market shares by 60 basis points, for example, supported by the continued rollout of our Persil 4in1 Discs and further innovations across different price tiers. After the successful pilot launch in e-commerce channels, we launched our sustainable Persil Eco Power Bars also at retailers in Austria, the Czech Republic and Slovakia, and more markets will also follow. And in Home Care, we continue to expand our position with share gains of 50 basis points. This was fueled by the rollout of strong innovations in Toilet Care and Dishwashing, under the brand's Bref and Somat. Moving on to digitalization, which continues to be a strong driver of our performance, expanded our digital sales share on Group level now to almost 20%. In Beauty Care and Laundry & Home Care combined, we grew e-commerce sales by around 20%. In Adhesive Technologies, we continue to expand our successful B2B e-shop onboarding for the customers to the platform. Digital sales again increased by a clear double-digit percentage. And with that, we have now reached a digital sales share of 30% in that business. But our digital transformation is not only related to sales. In the field of Industry 4.0, we were just recognized again by the World Economic Forum as the front runner. Our long run Home Care plan into Toluca in Mexico was awarded with the Advanced 4th Industrial Revolution Lighthouse, already the third plant, the Henkel plant that received this important industry award. These are just a few highlights, and the teams are driving further progress as we speak. And with this, let me hand over now to Marco, who will lead you through our business performance in more detail. Marco?

[Marco Swoboda:]

Thank you very much Carsten and good morning to everyone on the call, also from my side. Let's dive straight into the top line performance in the third quarter. We achieved a strong organic sales growth of 3.5% in the third quarter, driven by positive price development of 3.4%. And the stable volume development was characterized by normalization demand in our consumer businesses and the continued but slower recovery in industrial production. And the net effect of acquisitions and divestments had a slightly negative impact on sales of minus 0.3%. And this reflects the increasing impact from divestments completed year-to-date as part of our active portfolio management. Headwind from currencies reduced significantly compared to the first half of this year but still amounts to minus 1.3%. And in total, Henkel recorded a nominal sales increase of 1.9% to about €5.1 billion. Let's look at the regions. So from a regional point of view, we achieved organic sales growth in every region with the exception of North America. The emerging markets were strongly driving Henkel’s organic sales growth, with a high single-digit increase in each, Latin America, Eastern Europe, Africa, Middle East, and Asia Pacific. Our performance in mature markets overall was almost flat year-over-year with mixed developments in the regions. North America was lower year-on-year at minus 2.6% and as a result of declines in both Beauty Care and Laundry & Home Care. Whereas Adhesive Technologies achieved very strong growth despite the automotive weakness we do also witness in North America. And Western Europe recorded organic sales growth of 1.1% supported by positive growth in Laundry & Home Care, and again a very strong performance in Adhesive Technologies. So with that, let me provide more detail on the performance of our business units. Against an already positive prior year base and that is important to note, Adhesive Technologies, overall achieved organic sales growth of 7% in the third quarter of 2021. And by business area, Automotive & Metals remain slightly below the prior year, and also below pre-COVID levels. Automotive was a negative due to the reduction of global automotive production as a result of challenged supply chains and the semi-con shortage. Nevertheless, our Automotive business performed better than the light vehicle production index, which was down by about even minus 20%. Our Metals business in contrast, continue to perform very well and achieved double digit growth in Q3. Moving to Electronics & Industrials, here we saw double digit growth in both areas. We benefited from a recovery of our Industrials business as well as a continued strong customer demand in our Electronics business. And also in Packaging & Consumer goods, we achieved double-digit organic growth, thanks to a particularly strong growth in Packaging, as well as in Lifestyle and a strong growth in Consumer Goods. In Craftsmen, Construction & Professional, organics sales growth was very strong. The Consumers and Craftsmen business was lower compared to a strong prior year Q3 which had benefited from catch-up effects but well above pre-COVID levels. We could more than compensate this with significant growth in the Construction business, double digit growth in our General Manufacturing & Maintenance business. The significant organic sales growth of Adhesive Technologies was equally driven by volume and pricing. In the course of the year, we continuously increased our pricing, resulting in a contribution of 3.4% in the third quarter. From a regional perspective, all regions contributed to this development, with a very strong or double-digit growth. In the emerging markets, we grew significantly above prior year level. And in Eastern Europe, and Latin America, we achieved double-digit organic sales growth, particularly driven by our Packaging & Consumer goods business area. In the mature markets, all regions reached a very strong organic sales growth. Although North America and Western Europe were negatively impacted by the decline of automotive production, all other business areas could more than offset this development. So, let's look at Beauty Care. In Beauty Care, organic sales development was at minus 3%, below prior year, and with a mix development in all business areas. Our Professional business sustained its recovery and achieved strong organic sales growth against the prior year basis, which was already less impacted by the pandemic with more salons already back in operations. With this strong growth in the third quarter, we also exceed the pre-crisis level organically for the first time. In contrast, our Consumer business recorded an overall negative development against a very high prior year basis, mainly driven by strong market headwinds from the continued normalization of demand in Body Care, in particular, Soaps against the 2020 peak levels. This resulted in the double-digit market decline in key mature markets, North America and Western Europe. In addition, the business is still confronted with an unbalanced supply and demand situation including excess inventories affecting the whole market. The Hair Cosmetics category overall was slightly below prior year. But Styling continued its recovery with significant organic growth in the third quarter. Color recorded a decline, also here driven by normalization of demand compared to the higher prior year levels. And importantly, we were able to expand our market shares in both categories i.e., Color and Styling. In the Hair Care, organic sales development was below prior year. In Beauty Care, the positive price development was more than offset by volumes which declined by minus 4.7%. So that overall that resulted in negative sales performance of minus 3%. From a regional point of view, North America and Western Europe, our strong comeback in Professional could not compensate for the decline in our Consumer business, especially Body Care. In the emerging markets, Beauty Care achieved a very strong growth both in the Consumer and Professional businesses. This development was posted by all regions except Latin America. And finally, on to Laundry & Home Care, which achieved a good organic sales performance of plus 2% against a very high basis in the prior year and quarter. And this was, in particular, driven by Laundry Care which recorded strong organic sales growth. Heavy Duty Detergents contributed, with strong growth supported by our mega brand Persil which continued its excellent performance. Specialty detergents achieve double digit organic sales growth fueled by our key Perwoll. In Home Care, we recorded a slight decline in organic sales in the third quarter, mainly due to normalizing demand for hygiene articles, and the corresponding decline in the surface cleaner category. At the same time, we continued our strong performance in the Dishwashing and Toilet Care categories with strong and significant organic size increases, respectively. Also in the third quarter Laundry and Home Care continue to grow market shares, with gains in almost each region. The business unit even reached new record levels in Eastern Europe. The North America region remained behind the prior year level, both in terms of organic sales development as well as market shares. Here, our business continue to be affected by supply and logistics headwinds. Organic sales growth of Laundry & Home Care was entirely driven by price which increased 4.3% in the third quarter gradually stepping up compared to Q1 and Q2. Volume in contrast was at minus 2.2%, mainly resulting from an ongoing negative development in North America, as well as the further normalization of demand in hygiene categories. From a regional perspective, Laundry & Home Care achieved organic sales growth in each region, except for North America. In the Asia Pacific and Latin America regions, the business unit even recorded double-digit growth. Eastern Europe and Africa/Middle East achieved significant and very strong growth, respectively. Finally, Laundry & Home Care delivered positive organic growth in Western Europe. Let me close my financial review with an overview of the two-year growth rates. So overall, Henkel achieved a strong two-year organic sales CAGR of 3.7% in the third quarter. Following a slowdown in the second quarter, our growth profile gained traction again in Q3 on both Group and business unit levels. It is worth noting that all business units are back in a positive growth territory over that two-year period. Adhesive Technologies and Laundry & Home Care recorded a two-year CAGR of 4.1% and 4.8% respectively, in the third quarter. In contrast, Beauty Care sales year-to-date, are still below the 2019 level in organic terms. But also here, Q3 saw the business return to a positive two-year average growth rate. This is true for both Professional and Consumer. With this, handing back to you, Carsten.

[Carsten Knobel:]

Thank you, Marco. So before moving to the Q&A, let me close our presentation with the full year outlook and our key business priorities for the remainder of 2021. So based on our strong performance year-to-date, we expect that we will close the year well within our guidance range of 6% to 8% organic sales growth. Our business environment continues to be impacted by the COVID pandemic and its implication on economic activity. Consumer demand is returning to more normal levels in many categories, with varying dynamics and particular high volatility. Industrial demand is recovering sharply, with many sectors coming back to their respective pre-crisis levels, with growth held back by extreme supply shortages and logistic bottlenecks and with drastic and broad base increases of raw material prices and logistic costs. These headwinds intensified during the past months. And as a consequence, we are now assuming that direct material prices will increase this year by a low to mid-teens percentage. For sure, the teams at Henkel continue to work hard to limit the impact on our businesses and the profitability, going forward. We are reflecting this in our updated financial outlook for the full year and are now expecting an adjusted EBIT margin of around 13.5% and an adjusted EPS growth of a high single-digit percentage, which is representing the lower-end of our prior guidance ranges. Our priorities for the remainder of 2021 are clear. First, in these challenging and demanding times, we will continue to protect and support our employees, their families, our customers, and business partners. This remains on top of our agenda in the management board. Second, as we are facing an unprecedented situation in the raw material and supply markets, our focus is on managing our performance across all businesses, closely collaborating with our strategic partners to secure supply to our customers and working hard to limit the impact on Henkel’s profitability with continued pricing initiatives and savings. And at the same time, we continue driving the implementation of our purposeful growth agenda with full force and a specific focus this year on expanding our competitive edge and enhancing our company culture. With this, let us move to the Q&A. Ladies and gentlemen, we are now looking forward to taking your questions.

[Question-and:]

[Operator:]

Thank you, Mr. Knobel. Our first question comes from the line of Guillaume Delmas from UBS. Please go ahead.

[Guillaume Delmas:]

Thank you. Good morning, Carsten, Marco and Lars. And two questions from me, please. The first one on your Consumer Goods business in North America, because you were mentioning in August that you were at an inflection point and yet your organic sales growth is still negative in Q3, market share development seems also to be negative in Laundry. So appreciate you had a challenging base of comparison, some persistent supply chain issues but what tangible evidence do you have that would show that the turnaround plan is on track here? And I guess the bigger question is, at what point do you throw in the towel for this business? And then my second question, I mean, maybe a bit premature but can we talk a little bit about the 2022 margin outlook for Consumer Goods? Because when I look at the consensus on your website, it is for a meaningful expansion, 100 basis points in Beauty, 40 basis points in Laundry. I would not expect you to provide a 2022 margin guidance today. But directionally, do you think it's reasonable to assume such an uplift next year, given that, at least in the first half of 2022, you will still be facing the same challenging commodity and logistic headwinds? Thank you.

[Carsten Knobel:]

Yeah, good morning, Guillaume. Very happy to take your question. Let me start with the first one, the Consumer businesses in North America. So in North America, I think we were able, if you look, if we start with the Beauty Care part, we were able to significantly increase our market share in Hair, here driven by gains in both Color and also in Styling. And the same holds true for our Professional business, especially in North America, where we have a quite significant share. In contrast, the share of our Body Care category was lower year-over-year really also based on the quite challenging market environment. The relatively weak performance was mainly due to the strong market headwinds, which were triggered by a fast normalization of demand against the extreme peak levels in the prior year, especially in the key mature markets. And in addition, the businesses here are facing an unbalanced supply and demand situation, which is including excess inventories affecting, so the whole market. That's for the for the Beauty Care part. If we move to the Laundry & Home Care situation, yes, we recorded a negative organic sales development in Q3 against the high comparison base in the prior year quarter. And that affected and we were affected by severe material supply and inbound logistic challenges as a result of the supply chain disruption. As a result, and after a meaningful improvement in H1, the service levels in Q3 have been negatively affected by that. The turning around of our performance of Laundry & Home Care in North America is definitely, as I mentioned before, our top priority. And we are taking the decisive decisions actions, which are also related to our framework. And while we have not yet achieved the turnaround, we continue to execute our turnaround plan. We stepped up our innovation offensive with launches across our key brands. And to support our turnaround, you know that we installed last year with Al Wolpert, the new head. He finalized and brought his management team in the last couple of months, in place. And we are reorganizing also our structures to be more agile, and more collaborative. And we are further sharpening our portfolio and by that driving also key capabilities such as e-commerce, digital, and sustainability. Importantly, there are signs that our initiatives are starting to pay off. Overall, it is our clear ambition to reignite growth and significantly increased profitability, to reinvest in our brands in the foreseeable future. I think that's for the first part. And the second question was a question related to the full-year or more to the outlook in direction of 2022. And Guillaum, I hope you understand that at this point, I think it's too early and we don't provide the formal guidance for the fiscal year 2022. We will publish the guidance when we are presenting our results for the full year. Nevertheless, let me provide you some comments which are also in line with, I would say, recent statements from also from peer companies. First, I think the current forecasts, now for the IHS, so for the industrial side indicates a strong development of industrial production, with an expected growth of around 4%. Secondly, the demand in the consumer categories should continue also to further normalize. And third, from today's point of view, raw material cost inflation is expected to persist also into ’22, with continued high volatility and that particular in the first half year. So, however, I think it's difficult to make a reliable assessment at this point in time with regard to the exact extent and also the impact as well, the further development going forward. I hope that clarifies.

[Guillaume Delmas:]

Well, thanks.

[Carsten Knobel:]

You're welcome.

[Guillaume Delmas:]

Thank you very much, Carsten.

[Operator:]

Thank you very much. Our next question comes from the line of Bruno Monteyne from Bernstein. Please go ahead. Good morning, Carson.

[Bruno Monteyne:]

Good morning, Carsten. My first question is on the impact of commodities on your margin. Clearly, margins are down because of it and you haven't had time to reset pricing of your customers yet. But clearly, in the next 12 to 18 months, you will have time to reset pricing of your Consumer business. So I'd expect quite a recovery of some of that commodity price impact. Would it be fair to assume that the total impact on margin you would be planning to recoup will be about 50 to 100 basis points, whenever sort of the timing is right for that? My second one is, I'm trying to get a feeling for price elasticity in your business. But it's probably too early from the data we've seen so far because most of the price increases seem to be in emerging markets and the volume declines in developed markets. So in the next few quarters, as you're passing through prices in developed markets, let's say, you're passing -- increasing them by 300 basis points, would it be fair enough to assume that all the benefits from pricing in developed markets will probably be offset with lower volume growth, so we shouldn't really expect an acceleration of -- in the top line in the next few quarters on the back of that? Thank you.

[Carsten Knobel:]

Good morning. Good morning, Bruno. I would start with the second one, maybe Marco you take then the impact on the commodities. So and first of all, Bruno, I think what we can see is, if you look and if we start maybe with the Adhesives part, what we have been able now, if you take quarter one, two and three, we have almost doubled the pricing from 0.7% in quarter one to 1.7% in quarter two, and now 3.4%, in quarter three. And as we have mentioned it before, we have been and we will be always able to bring that price increases which we face to our markets -- to our customers with a certain time delay. If you look at consumers, as we have mentioned, always it's more difficult to get that through. And also, the discussions with the retailers are more difficult. And I think that's not only for us, for Henkel, it’s for the whole industry. And taking that into account, when you talk about elasticity, too early in terms of, to judge because the price increases especially in the consumer markets will happen while we're speaking or even have been partly starting, but also will come and therefore elasticity is at this point difficult to comment on. What we currently see, that there is not a big shift between the price increases we execute and a volume related reduction. Maybe we take now the other one Marco, the commodity part.

[Marco Swoboda:]

So and what clearly we see, as you mentioned, is inflation especially on input -- on the input side on commodities, and that indeed has a strong impact on margins. And for sure, it is our ambition to pass through that higher commodity costs finally, also to the customers, partly also compensate by efficiencies like we always said. So, it will be at the end, a mix of measures that is required. And from a pass through, very clearly we want to pass on the absolute cost increase that we do see and therefore, we do expect that also margins will recover from that point of view. I do not comment on the size of that recovery, but for sure, a higher pass on in the future means an increase on the margin. But what is also important when you look at the whole topic when you look at it from a mathematical effect, passing on absolute cost increases to the customers finally, at the end means that you also say that it is possible to have a negative impact on margin. So at the end, we have to see what the balance then will be, higher pass through than in the year 2021, but then also from a mathematical point of view, higher turnover. But then basically if you compensate one on one your input cost from a gross profit level, then if you take all that into account, you also have a negative impact. And the net effect on margins is what we’re going to see in the future. So, as we cannot give a guidance, I cannot comment on where we stand. But what is very clear, price increases are very high on our agenda. That's the only way to now deal with that environment like also competition does and we are actively working on that to also pass through up next year.

[Bruno Monteyne:]

Thank you.

[Operator:]

Thank you very much. Our next question comes from the line of Christian Faitz from Kepler. Please go ahead.

[Christian Faitz:]

Yes, thank you. Good morning Carsten and Marco, and Lars and team. Two questions, please. First of all, on the Adhesive side, what are your sales people telling you about the current demand situation in Automotive? Is there any silver lining on the horizon? Or is it still unclear when the semi-driven, semiconductor driven demand slowdown in Automotive will pick up again? And then second, what are you doing on the hedging side in terms of raw materials? Can you do anything at all? And maybe you can share some insights how long a typical raw material supply contract is for Henkel? Thank you.

[Carsten Knobel:]

Christian, good morning. So, I will take the question of Adhesives and Marco will then comment on the hedging of raw materials. So first of all, according to IHS, the global light vehicle production declined significantly by around minus 20% in Q3, primarily due to semiconductor shortages. And while this impacted also our Automotive business, I think it recorded a single digit percentage decline compared to the prior year and by that also outperforming the overall automotive market. And as you know, moreover, with our expertise and our innovative technologies, I think we are very well positioned to continue winning with new businesses in this growing market of immobility. And by that, Hankel is continuously investing also in production facilities, in order to drive that. How this will continue is maybe also difficult to judge. You may recall, I think, during the half year call, we talked about that we would have -- we had impact, well we were estimating to have impact of around €80 million from the semiconductor shortages. And this for sure significantly increased now in the in the second half of the year, I would say to a level of the mid to 100 or around €130 million to €150 million. Nevertheless, as you have seen, we have been able to compensate or even overcompensate that with other segments. And how the situation will turn? It's difficult to judge but I think we will be also still impacted also at the beginning of the year. But as I mentioned it before, there are a lot of other sectors and opportunities where we can compensate. Hope that helps a little bit Christian and for the second question but and for the second question --

[Christian Faitz:]

Yes, very helpful, thanks.

[Carsten Knobel:]

And for the second one, I will hand over to Marco.

[Marco Swoboda:]

So yeah, Christian, your first part of the question related to hedging of raw materials. Like we said in the past, there is not a material effect that we can have from hedging because what we do buy is typically not the base chemicals or base commodities that you may be able to hedge. So, from that point of view, financial hedging, we don't apply to a significant effect, only for very small elements, where that is possible. On the supply contract length, I think that relates then your question, I mean, what other measures or tools do we have basically to deal with the current environment and when is actually the current input cost inflation arriving. And so on the contract length, that is typically two to three months. And what we do see here, but for some contracts, we also have formula based pricing. So that is where also effects from base chemicals or base commodities would come through a bit quicker. But the good thing in formula pricing is that basically the suppliers can’t enlarge their margins on what they deliver to us, even if there's a big scarcity in the market. So that's why, in part, we also favor formula pricing. But of course, we see significant developments also in these commodities that are the underlying of this formula. So we will see also some effects even coming through shorter than the two to three months. So that's basically, I think, to your question.

[Christian Faitz:]

Great, thank you very much, Carsten and Marco.

[Operator:]

Thank you very much. Our next question comes from the line of Celine Pannuti from JPMorgan. Please go ahead.

[Celine Pannuti:]

Good morning. Thank you, and good morning, everyone. So my first question is on Beauty. The volume was quite low, negative -- minus 4.7%. Could you give us a bit of a flavor of how it was -- Professional versus the rest, which I think Professional must have been positive but if you could give us an idea? And you were talking about this issue of oversupply. Does it mean that that kind of magnitude of hit to your Body Care business will continue into fourth quarter? My second question exactly is related to that. If I think about three years in a row, since 2019, you have reinvested a big chunk behind both Beauty and Laundry & Home Care. You know, three years down the line, what do you think you need to do in terms of reinvestment? Should we expect that this is something that needs to continue to be amended, and therefore something that will come on top in 2022? Thank you.

[Carsten Knobel:]

Hello, Celine. Good morning. To your first question, if we have the split between the retail and Professional business, the negative organic sales development in the Consumer business was mainly due to declining markets in some of our key categories against the background of the pandemic-related normalization of demand and a very high comparison at the previous year peak levels. In some of the key categories, I think we recorded around 7% top line in Q3 2020. And as I pointed out before, the main driver was the performance in Body Care, which recorded a clear double-digit organic sales decline in Q3. And this was particularly due to the significant decline in the stock market, in the key markets of North America and Western Europe, resulting from a normalization of the demand, I mentioned before, of the peak levels, and due to an unbalanced supply demand situation and the excess of the inventory levels. In contrast, the Consumer Hair, I mentioned that also was overall slightly below the prior year with mixed developments. We had very good development in Styling to continue to recover and posted also significant organic sales growth, after it just turned positive in Q2 of last year. And, and in Color, we continue to gain shares in Q3 in the overall -- in an overall declining market. Moving to the Professional part, the Professional part did not experience material restrictions in terms of long lockdown in the third quarter anymore. So subject, due to further pandemic development, we expect stability and further normalization of the situation also in ’22. So that's to the situation in -- to your first question of Beauty. Your second part, only for clarification Celine, it means when you talk about investments, you're talking about the marketing investments, correct?

[Celine Pannuti:]

Exactly, yeah.

[Carsten Knobel:]

Okay, then it’s clear. So, if we take that into account, so year-to-date, we continue to invest in our brands, on the increased level. We announced in March 2020, when you recalled, where we made the kind of margin reset and by saying, we want to invest €200 million more than ’20 and ’18 and 350 -- no, €200 million more than ’19 and €350 million more than 2018. So with somewhat, this time with some somewhat stronger investment increases in the Beauty Care, Consumer as well as the Professional, in this year, I hope you please understand that I do not provide a formal guidance on our marketing and advertising spent for the full year. But of course, in this dynamic economic and competitive environment, we need to keep a high degree of flexibility in adjusting the measures and also the marketing spend. And also going forward we’ll ensure that the investments are very targeted and reasonable. And I think coming back to the situation, what we have seen also in terms of market shares, I mentioned it, I think we have seen in Laundry & Home Care, market share gains in all countries in all regions. So, therefore, the elasticity of the additional marketing spend plays a good role for sure. It's not a single individual component, because it's also related to innovation and teams and so on. With the exception of North America, I think I've been clear and transparent. And in Beauty Care, I think the situation is that it is paying good -- paying in a good way off when it comes to the Professional part, where we see really good developments. And the same, I mentioned before for Color, and Styling. The Body Care, I think I explained in detail that it is significantly also impacted by the whole COVID situation and the way of normalization of the situation.

[Celine Pannuti:]

Thank you.

[Carsten Knobel:]

You're welcome, Celine.

[Operator:]

Thank you. Our next question comes from the line of Tom Sykes from Deutsche Bank. Please go ahead.

[Tom Sykes:]

Yeah, morning, everybody. Firstly, just on Adhesives. And given you've got some volume growth there and obviously price growth, are you able to say whether as a run rate, your absolute EBIT level in Adhesives is flat at all, or stable at least? And then are you able to say something about the inventories on both the customer and on the supply side, please? And then just as a follow up on the earlier questions on consumer, and I guess, particularly in North America, do you expect any negative impact on shelf space or listings for full year ’22 from the service level impacts in full year ’21, please?

[Carsten Knobel:]

So, Tom, maybe I start with the follow up questions, the last one. We're not expecting any negative impacts on that, in terms of that the service levels are impacting the shelf, because we are on the measures to improve the situation because mainly the impact was not negative performance from our side or operator performance but was really shortages of materials which is not only affecting us. To the question of Adhesives, as far as we can assess it, we did not experience significant catch up or stocking dynamics, as a consequence of our pricing initiatives. We also did not face any major volume losses, as evidenced by the overall strong volume growth of 3.6%. So, therefore, I think nothing to add more, and maybe the inventory part, Marco, can you take that?

[Marco Swoboda:]

So when it comes to Henkel, then of course, we do revisit year end our inventory levels also to increase selectively safety stocks to deal better with the current volatility on the supply markets. And in that sense, from a net effect, there will be probably some also increases in inventories compared to what we have seen in the past. But not dramatically, but selectively where we see big shortages, and therefore also in the future.

[Tom Sykes:]

Again, so sorry, I just didn't quite understand the comment on . Your absolute EBIT level in Adhesives, what are you saying there? So is it, are you matching prices versus -- price and volume versus the cost increases now, or is that still to come?

[Marco Swoboda:]

I mean we, basically maybe I’ll take that one. Maybe to look at it from a different perspective we always have. In Adhesives we have a pass through of raw material cost that takes a while to get digested. And that pass through overtime is after roughly three to six months. So from that perspective, we are not yet there to pass it over. And then so far from a margin perspective, for sure, on a net basis, at the moment we are still being hit. But as we said, experience shows in Adhesive technologies that we are able to cope with these environments, with a time lag of three to six months. And that’s I think what we can say at that point.

[Carsten Knobel:]

And the strong evidence that we are passing through prices is what I mentioned before in one of my comments, if you see the accelerating trend of the price component from 0.7% to 1.7% to 3.4%. Now in the quarters of Q1, Q2, and Q3, I think we have doubled the pricing in each consecutive quarter. And I think that's exactly what Marco has pointed out. But maybe I had not understood your question well enough.

[Tom Sykes:]

Yeah, no problem. Thanks very much for the clarification. Thank you.

[Carsten Knobel:]

Okay. You're welcome.

[Operator:]

Thank you very much. Our next question comes from the line of Ian Simpson from Barclays. Please go ahead.

[Iain Simpson:]

Thank you very much. So a couple of questions from me if that's okay. Firstly, just very quickly, could you give us any idea as to what proportion of pricing across your business rolls over in January because I think European branded stuff is often on kind of annual pricing cycles? I think some of your adhesives business as well. So just any idea of what proportion of price contracts roll over in January, ideally by division, would be great. Thanks. And secondly, I wondered if you could talk at all about within Beauty, in particular, Hair Styling and Hair Color, whether you're seeing any actual fashion changes, post-COVID or how the consumers approached to their hair is changing now that people can kind of get out and about again? Some of your competitors have mentioned that they've seen categories like color cosmetics doing a bit better. I wondered if you could comment at all on how that's going with Hair, or perhaps provide an update on your own recent kind of move into color cosmetics got to be? And then just finally, sorry to come back to it but the US supply chain issues. I think you've had quite a few of those over the last five, six years, where your supply chain there seems to kind of suffer a problem every 18 months or so. I just wondered if you felt confident that you just had a series of unconnected events and it was just coincidence. Or if you felt there might be any sort of bigger structural implications in how you're running your US supply chain and perhaps needed revisiting? Thank you very much.

[Carsten Knobel:]

So, Ian, a couple of questions. Coming back, I think I will take the pricing one and also the question related to Beauty and Marco then will comment on the supply chain situation. So maybe start with Beauty. So what I mentioned before is definitely I think we're seeing normalization of trends or based on the COVID situation, in Styling, in Color and at home colorations always needs to be seen, then also, for sure, with the Professional business. And I mentioned it before. I think here in that part, we see from a business performance perspective, really good developments. We see increasing market shares in Styling, in Color, in Home, but also in the Professional business over all. Are there new trends? Now, I would say for sure, you can imagine now with some parts that markets or also activities in the evening getting open that people are coming back on that and also very motivated to spend and to show. Therefore I think Styling and Color situations are from a trend perspective, in general positive, but there are from my point of view, not extraordinary new ways, how people style or how people color in a way. On the situation of when you mentioned the color cosmetics launch of and got2b, I think it's too early to make an assessment regarding the launch of the got2b makeup portfolio. It was launched and rolled out just in the late Q3. And is meanwhile available in many stores of some of the major retailers in Germany, and the launch was supported by a good media campaign, which also delivered the good results. I think, on that part. Coming to your pricing question, your first one, in terms of how the things going into the next year. I think I said it, I think as you can see, in the first three quarters, we doubled the pricing in each consecutive quarter and in the fourth quarter pricing was expected to further increase to support our organic state's performance. So, therefore, it will be definitely above what we have seen in Q3 of this year. And by that, I think we had it last time and there is no big difference in terms of that we are saying that a big portion of this raw material increase 70%, 80% will be seen within this year, but there will be spillover effects to not only to January but to next year. And this we will see definitely then, within ’22. And maybe for the last part Marco, the supply situation.

[Marco Swoboda:]

Yes. So, when we look overall at the supply situation worldwide, of course, now all the businesses, companies struggle in different also categories and segments. So that's what we see overall, throughout the whole economy. When we look at Henkel, in the first nine months, we did record globally an all-time high of supply disruptions or force majeure that basically, our suppliers do declare, and that number has reached even now the first nine month, a number of 1300. And that compares with a number of maybe 100, around 150 incidents in a normal year, so dramatic, dramatic uplift. And that's even more than in the COVID year 2020, where we had roughly 600 supply disruptions. So worldwide, it's really challenging environment that we’re operating in. And when it comes to North America, here, we are particularly hard hit also by a number of events. So first, the weather related phenomenons that we had seen. So beginning of the year, basically the freeze of the Gulf Coast leading to a lot of petrochemical facilities having to be stopped, affecting the whole commodity supply in North America, and gradually recovering throughout Q1, Q2. And then in September, Hurricane Ida either hit, again, the industry also then imposing new shortages due to plant shutdowns of suppliers. And that is basically hitting, of course, not only us but the general industry in North America. On top, we do see very strong shortages, also in logistics capacities. So there's a severe shortage of truck drivers, for example, in North America, also making it hard even if you can secure the supply, but then you have to arrange transportation from the supplier’s plant to your own facilities. And that is the second challenge that the teams are working on and we have task forces in place, or they have to deal with it. But it's a difficult situation. And that is not hitting us alone. That is basically a phenomenon we do see, so many, many companies struggle with it. Also our customers, by the way, do struggle with it, in particular, in the fast moving consumer goods area where we often have contracts where basically the customer is responsible for picking up the goods at our factories. So that has proven for the customer to be a very efficient model in the past. That's why typically certain customers do prefer that. But also here customers fail to arrange transportation, the pickups that they are responsible for and basically working with our customers through that. But that shows that is not a Henkel phenomenon, per se. So to your question, is it structural? We think, not really because at the end, that is what we see not only hitting us, but also our customers. In the past, we had, as you pointed rightly out, also certain issues in North America when it came to supply chain. And back in 2018, that was more self-inflicted, in fact, due to the change of our logistics IT system at the time. So that was a completely different impact that we had then. Now basically, the industry is struggling with the current conditions in the market.

[Iain Simpson:]

Thank you.

[Operator:]

Thank you very much for your questions, ladies and gentlemen. I'd now like to hand back to Mr. Knobel for his closing remarks. Thank you.

[Carsten Knobel:]

Thank you. So first of all, thank you for your questions. And let me close today's presentation with a summary of our key takeaways. In the third quarter, we sustained our growth path with a strong organic sales growth of 3.5%. And this corresponds to a strong annual growth performance of close to 4% since the third quarter of 2019, with all businesses exceeding their respective pre-crisis levels organically. In our markets, we saw a continued recovery of industrial production as well as a further normalization of demand in relevant consumer categories. And these dynamics were reflected in the development of our business units. We have been experiencing further headwinds from extremely tight supply in raw material markets. And we have been managing those with our teams in an agile way with extensive measures to limit the impact on our business and the profitability. And we are reflecting all of this in our updated outlook for 2021. And finally, we continue to drive the execution of our purposeful growth agenda across the pillar. And as always, please be reminded of our upcoming events. Our next event will be the publication of our fiscal year release in February. And with this, I would like to thank you for joining our call today. And take care, stay safe and also stay healthy. Bye-bye.

[Operator:]

Thank you very much, ladies and gentlemen for joining today's Henkel conference call. You may now disconnect your lines. And we wish you a pleasant day.