Henkel AG & Co KGaA

XETRA:HEN3

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the Henkel Q1 2022 Conference Call. With us today are Carsten Knobel, CEO; Marco Swoboda, CFO; Wolfgang König, Executive Vice President, Beauty Care; and the Investor Relations team.

[Operator Instructions] 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 you 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, executive]

Dear investors and analysts, good morning from Düsseldorf, and welcome to our conference call on the first quarter of 2022. Thank you for joining us. And together with our CFO, Marco Swoboda, I would like to talk you through the key topics and the sales development in the first quarter. And as announced, we will also provide more details on the merger of our Laundry & Home Care and Beauty Care businesses. That is why today, we are joined by Wolfgang König, the future leader of our combined consumer platform Henkel Consumer Brands.

Before we start, as always, I would like to remind everyone that this 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 concluded subject to this disclaimer. I will not read the disclaimer, but we take it as read into the record for the purpose of this conference call. Let us kick off with the key topics for today's conference call.

First, we will take a deeper look at our sales performance in the first quarter. Along with our updated outlook, which reflects the most recent developments in our business environment, we had already published our results based on preliminary figures last week. And second, as said, we will provide more color on our progress regarding the merger of our Laundry & Home Care and Beauty Care businesses into the integrated unit, Henkel Consumer Brands included the targeted synergies and restructuring charges.

But let us start with the major development in our business environment. In line with what we shared last Friday, Henkel achieved a significant organic sales growth of 7.1% in the first quarter. This development was driven by strong pricing across all 3 businesses. In nominal terms, the sales on group level reached EUR 5.3 billion.

As we will discuss the business unit performance later in more detail, I will now focus on the key points only. Adhesive Technologies delivered an organic sales growth of 10.7%. Here, the double-digit increase was driven by all 4 business areas. Beauty Care recorded an organic sales development of minus 1.2%, while the Consumer business was negatively impacted by the announced implementation of the portfolio measures, our professional business reached a double-digit increase, thereby continuing its growth path.

And third, Laundry & Home Care posted a very strong organic sales growth of 4.9%. Here, laundry Care achieved significant growth; in contrast, Home Care was slightly below the prior year level, mainly due to the normalization of the demand for hard surface cleaners. We achieved this performance in a highly demanding and volatile environment, characterized by 2 key topics. The war of Russia against Ukraine has broad implications. Our primary concern has been the safety and well-being of our colleagues in the Ukraine and their families. And of course, the war is also affecting our business performance in Ukraine.

Against the background of current developments, we decided to exit our business activities in Russia on April 19. We have been clear that this was not an easy decision to make. Last Friday, we also announced to exit our business in Belarus. Of course, the exit from these countries will have a significant effect on our sales and profitability.

Beyond the implications for Henkel, the war also intensified the already very tense situation on the raw material and logistics markets. And also the COVID lockdowns in China contribute further to this. As a result, there is a drastic inflation on the input cost side at levels we have never seen before.

With this, moving on to the deep dive now on our business performance in the first 3 months and to our recently updated outlook, and for this, I will now hand over to Marco. Marco, please.

[Marco Swoboda, executive]

Thank you, Carsten, and good morning to everyone on the call, of course, also from my end. Looking at the drivers of the group sales performance in the first quarter now. And as Carsten mentioned, the significant organic sales growth of 7% was driven by strong pricing across all business units, on group level, a plus of 9.4%.

In contrast, volumes declined by 2.3% compared to the prior year. Overall, Henkel increased nominal sales by 6% to a level of EUR 5.3 billion. Now let's look at the organic sales development by region. The organic sales growth was primarily driven by the emerging markets, where we achieved double-digit growth of 11.4%, but also mature markets showed a strong development of 3.1%. While North America recorded a very strong organic sales growth, the performance in Western Europe was slightly negative.

Let's now take a deeper look at our business units. In the first quarter, Adhesive Technologies benefited from a continued strong growth momentum. The business unit reached organic sales growth of 10.7%, driven by double-digit pricing at stable volumes. In a challenging market environment, all business areas and additions contributed to this development and yet to different extents, of course.

Automotive & Metals achieved overall good organic sales growth, driven by double-digit growth in our metal business. In the automotive business, however, volumes were negatively affected by the decrease in automotive production, particularly due to the continued semiconductor supply shortage.

Pricing measures could partially offset the volume decline. Our packaging and consumer goods business showed double-digit sales growth. And here, the development was driven by strong volumes as well as double-digit pricing measures to offset the higher raw material cost which affect this division to the largest extent. The Packaging and Lifestyle businesses, particularly contributed to the overall growth. Electronics & Industrials achieved significant organic growth driven by pricing. Our Electronics business showed a positive performance and our Industrials business grew double digit.

Now Craftsmen, Construction & Professional business area, the significant organic sales growth was driven by double-digit pricing with support from all individual businesses. The general manufacturing and construction businesses reached even double-digit organic sales growth rates.

And to the regional perspective now, sales in the emerging markets grew double digit compared to the first quarter of last year. The regions Eastern Europe, Latin America increased double digit organically, particularly supported by our packaging and consumer goods business area. The regions Middle East and Africa and the emerging markets of Asia registered significant and very strong growth, respectively. However, COVID restrictions in China started to limit business activities towards the end of Q1.

The mature markets posted overall significant organic sales growth. North America achieved a double-digit increase. Our business in Western Europe achieved very strong growth. In the mature markets of Asia, we achieved significant organic sales growth.

On to Beauty Care, which recorded a slightly negative organic sales development of minus 1.2%. A strong pricing could not fully compensate lower volumes. Key driver of the negative volume effects were the announced portfolio measures in our Consumer business area. Here, we had announced that over the course of the year, we will discontinue business activities equivalent to around 5% of the business unit sale in fiscal 2021.

Looking at the individual performances of the 2 business areas, the Consumer business remained below the prior year level. Here, the hair cosmetics category posted an overall negative performance with mixed developments in the different businesses. Styling continued its recovery and achieved double-digit organic sales growth. In contrast, demand for colorations continued to normalize from elevated prior year levels, resulting in a negative sales development. Also, in Hair Care, we recorded sales below the prior year. And the negative development in Body Care was mainly due to the portfolio measures I just mentioned before.

At the same time, our Professional business continues its growth path and recorded double-digit growth. A particular strong contribution came from our key markets, Europe and North America, which recorded double-digit growth rates.

From a regional perspective, Beauty Care achieved good organic sales growth in the emerging markets, while sales in the mature markets were below prior year. Within the emerging markets, we recorded significant sales growth in the regions, Asia Pacific and Latin America.

Sales in Eastern Europe increased very strongly. Middle East Africa showed a negative sales development, mainly due to the portfolio measures in our consumer businesses I talked about earlier. The mature markets in Asia Pacific registered strong organic sales growth. The good growth in North America was driven by our Professional business. Sales in Western Europe were below prior year. This was mainly due to normalizing demand in the hair coloration category as well as the portfolio measures.

Laundry & Home Care delivered a very strong organic sales growth of 4.9%. Pricing was up double digit, while volumes declined. All in all, growth was driven by our Laundry Care business area with a particular strong contribution from heavy-duty detergents and fabric finishes. Here, the significant growth was supported by our core brand, Brazil and our North American brand, all.

Our special detergents category even showed double-digit growth. At the same time, our Home Care business area recorded a slightly negative development. This was due to declining demand for Hard Surface Cleaners which had recorded elevated demand levels due to the COVID-19 pandemic before.

The positive, respectively, good development of the Dishwashing and Toilet Care categories could not compensate for this effect. To the regional development now of Laundry & Home Care. The emerging markets showed growth across all regions and all in all, grew by a double-digit percentage. Sales in our mature markets showed an overall positive development.

Here, we recorded good growth in North America and even double-digit growth in the mature markets of Asia Pacific. In contrast, sales in Western Europe were organically below prior year. Especially here, sales were impacted by intense price negotiations with our trade customers.

With this, moving on to our outlook, which we updated end of last week. And as we discussed in our last conference call on Friday already in detail, but let me now quickly summarize the key points. On group level, we now expect organic sales growth in the range of 3.5% to 5.5% due to a high expectation for Adhesive Technologies, for which we foresee stronger pricing.

For Beauty Care and Laundry & Home Care, our organic sales guidance remains unchanged. Here, we expect higher pricing, but also lower volumes than initially assumed. For the adjusted EBIT margin, we updated our guidance to a level of 9% to 11%, reflecting the pressures from drastic input cost inflation as well as to the impact from exiting our businesses in Russia and Belarus.

This also translated in an update for our adjusted EPS growth. Here, we now anticipate the development in the range of minus 35% to minus 15% at constant exchange rates. From a phasing point of view, we expect the decline to be lower in the second half of the year compared to the first half of the year.

Also with regard to the underlying assumptions, obviously, no change to what we shared last week. We considered the exit from our business activities in Russia and Belarus and the implications of the war for our Ukrainian business. The war also further accelerated the already tense and volatile situation on the raw material and logistics market where we see unprecedented headwinds from input costs.

On average, we now anticipate direct material prices to increase by mid-20s percentage versus last year. In absolute terms, this equals a gross price inflation of EUR 2 billion, twice as high as in 2021. And of course, we are stepping up our countermeasures to mitigate the effects on our profitability.

And we also discussed the mathematical effect on the margin that the margin will be diluted when passing through higher prices in absolute terms because all else being equal, sales will increase while EBIT remains stable. We are facing drastic headwinds from the price inflation of raw materials and logistics. And of course, we launched comprehensive countermeasures.

Next to savings initiatives in supply chain and procurement, we will further step up pricing. Already in the first quarter, we have seen strong pricing across all businesses resulting in a price contribution of 9.4% to organic sales growth on group level. But what is clear, we will need additional pricing efforts. And while we expect that we will not be able to compensate for the headwinds on the raw material side already this year, we are confident to recover our profitability over time.

With that, back to you, Carsten.

[Carsten Knobel, executive]

Thank you, Marco. So let us now move on to the second key topic of today's call. Coming to one of our strategic focus areas for the year 2022 is the merger of our 2 consumer businesses, Laundry & Home Care and Beauty Care into 1 combined business, Henkel Consumer Brands. Together with Wolfgang, we will provide a progress update regarding the merger of our consumer businesses to create Henkel Consumer Brands, and we will also share more details on the targeted synergies and the restructuring charges.

But first, let me very briefly recap on our strategic rationale which is behind the merger. By combining our 2 consumer businesses, we are able to build a new growth model that is sustainable. Henkel Consumer Brands will represent 1 strong integrated business unit next to our successful Adhesive Technology business and that will drive the future growth of Henkel.

We are driving growth and profitability by establishing 1 combined portfolio and leading categories and brands, creating strong country platforms with increased importance and relevance for trade and serving our customers and consumers out of 1 team. Moreover, we will focus on stronger gross margins in all our strategic decisions.

For example, by investing in our brands and profitable high gross margin sales to increase our pricing power. And merging the Laundry & Home Care and Beauty Care organizations into 1 merged synergistic organization, we are able to lift significant organizational synergies in the areas of sales, admin, supply chain, production, advertising and promotion.

And last, but not least, the merger enables us to take bolder actions in active portfolio management, which would not have been possible beforehand. With this winning combination, we will take our purposeful growth agenda to the next level and drive growth and profitability, both for our combined consumer platform and for Henkel.

And with this, now let me hand over to Wolfgang, the future leader of our Henkel Consumer Brands business. Wolfgang, please?

[Wolfgang König, executive]

Thank you, Carsten, and good morning from my side as well. Please let me use this opportunity to briefly introduce myself. Since June '21, I'm the Executive Vice President for Henkel Beauty Care. I see myself as a global citizen who holds the German passport while also being a U.S. resident. My passion are brands, driving business growth and profitability, which have been doing over 26 years in the consumer goods industry.

Before joining Henkel, I've worked for 3 FMCG companies starting my career at Beiersdorf, later joining Colgate-Palmolive and before Henkel, the last company I've been at was Kellogg. For all my prior companies, I've held positions in Europe and North America. While starting my career in marketing and sales have overlooked increasingly larger operations with full end-to-end commercial responsibility, including complex supply chain and manufacturing networks. My career has so far stretched across 3 continents, having been located in Europe, Latin America and the U.S.

But in the U.S., I've spent around 12 years of my career. Having spent my whole life building brands and looking back at my prior experiences in Beauty, Personal Care as well as Home Care Categories, I was, of course, intrigued to join Henkel and now having the opportunity to significantly shape the future of the consumer goods business this year.

Now focusing on the merger of our Laundry & Home Care and Beauty Care businesses. It's a critical part of our new orientation to focus on 2 global categories with Laundry & Home Care and Hair Care which are attractive. They are sizable and growing. The 2 global core categories alone are representing sizable market opportunities amounting to EUR 230 billion, representing significant headroom for the future growth of the Henkel Consumer Brands business.

Furthermore, Henkel is well present in select categories with regional presence. For example, our body cleansing and personal hygiene brands in Europe and North America. Our Henkel Consumer Brands way forward includes a healthy obsession around gross margin. With that context, what we define as our core delivers around 300 basis points margin above our average.

Furthermore, in the future, we will focus our business priorities on high-margin country category combinations or as we refer to it, attractive sales. We are going to increasingly focus on these attractive sales, building on strong in-market position. Looking at our market positions in the markets where we are active, we hold various leading positions.

In Laundry & Home Care, we're well positioned globally as #2. Additionally, we hold Laundry & Home Care #1 in Europe and #2 in North America. Also in terms of segments, we can record strong positions. For example, in Toilet Care, being #1 globally. In Hair Care, we are the core #2 in professional globally, hold the #2 in Hair Care in Europe and the #1 in the segment Styling and #2 in the segment Coloration globally.

With this, it becomes clear that our market positions are already strong and represent a good starting point for future growth potential. On 1 side, our 2 global core categories, Laundry & Home Care and Hair Care already account for 85% of our sales. Furthermore, 85% of the sales are generated in our top 20 countries and markets, which shows that we are building on a strong foundation of key markets. Those numbers show that our focus areas also comprise to a major part of our business today. More focus and those will benefit the vast majority of our sales end markets.

On the other side, I see it as a very beneficial that we only generate 40% of our sales with our top 20 customers. we are not overly dependent on a small group of clients in our business. In addition, we have a very obvious overlap of customers across Laundry and Home Care and Beauty Care and see a positive cross fertilization of unique channel strength that each business contributes. Building on this strong foundation, we have high ambitions with what we want to aim to achieve with this business.

In January, we've presented our mid- to long-term financial ambition for Henkel Consumer Brands. We believe in organic growth between 3% to 4% and achieve an adjusted EBIT margin within the mid-teens. Of course, we are not there yet, and this is an ambitious goal. Let me show you over the next 2 pages how we plan to leverage the merger to deliver against our financial ambitions.

We are going to release various levers, including shaping our portfolio, creating 1 new organization out of the 2 separate ones, consolidating our supply chain and investing into profitable growth sales. To shape a healthy growth portfolio, we set key criteria for our target portfolio, including 3 key elements, an above average gross margin, organic growth potential and building on strong in-market positions.

By combining the 2 consumer businesses, we increase the critical mass in core markets, which helps us to facilitate portfolio management in a more consequent way than possibly before within our previous setup. Due to the scale we generate through the combination, it will, for example, allow us to divest or exit businesses which in the prior setup would have led to a significant loss of scale, leading into situations where post the divestiture, we would have seen issues on our ability to run an effective organization post managing remnant costs.

Out of the current portfolio, we've identified up to EUR 1 billion worth of businesses, we are going to review, and we will decide if these candidates will have the potential for either divestment, discontinuation or manage for profit. In addition, we will, of course, continue to expand the consumer business in the future. Being 1 consumer unit, it widens our scope of potential new categories from an M&A point of view, while at the same time, being clear that our ambition remains to grow our consumer core categories, both organically as well as via M&A.

We also expect a significant organizational synergy out of the merger to positively contribute to our financial ambitions. Leaner structures are going to enable increased agility through significantly reduced management positions. One phase to our retail customers with 1 combined sales team per country, reduction of redundant tasks, workflows and procedures and efficient use of shared service centers for in-sourcing and offshoring are amongst the key pillars we are going to execute.

One expected outcome of combining the currently separated centers of excellence we have in both of our businesses will be a competitive edge around digitalization and sustainability. Another key area where we're going to leverage the merger and obtain significant synergies from is the consolidation of our global supply chain network.

Our current set of Beauty Care and Laundry & Home Care includes around 470 contract manufacturers and co-packers and 140 warehouses in logistic locations. It is very obvious that this offers potential for streamlining and building 1 cohesive network with ideally at the end, 1 truck to our customers.

Our network includes around 45 manufacturing sites with potential for footprint optimization, increased in-house production, utilizing existing space and capacity, all aiming to drive gross margin enhancement. From a timing perspective, over the next month, we are focusing on our organizational setup and synergy realization connected to the SG&A part. And while there will be some continuous improvement initiatives in the supply chain already taking place in '22 and '23, we expect the major footprint optimizations and network changes to be realized in the years after the reorganization.

So summing that up, with the before mentioned measures, we aim to reach around EUR 500 million gross savings per year, driven by multiple levers, active portfolio management, SG&A and supply chain optimization. We are planning to realize the synergies in 2 phases. During Phase 1, the underlying organizational changes will mostly be implemented until the end of '23.

We expect EUR 250 million annual net savings, which will be realized in full swing as of 2024. These savings are mainly driven by the before-mentioned SG&A synergies, consistent organizational optimizations as well as some adjustment opportunities in the A&P space. This will also lead into an impact of approximately 2,000 mainly white collar employees. Onetime costs expected are around EUR 350 million to the majority restructuring expenses, the remainder relating to onetime integration costs.

As mentioned before, we have up to EUR 1 billion sales under review for portfolio measures. Further information will be shared at an appropriate time. Within Phase 2, we are focusing on the period until 2025. This sale will, in its core, be focused on optimizing our combined supply chain footprint, as mentioned before.

Details on net savings, onetime costs and CapEx are further specified. But as we already stated, we aim to generate around EUR 500 million gross savings across Phase 1 and 2 combined. We are aiming to get our Consumer Brands business into positive crossfire. In a nutshell, number one, enhancing our gross margin; number two, concentrated high level of brand support; number three, pricing our brands to the ideal value volume point to further fuel our gross margin.

Let me explain that a little bit further. Focusing on a portfolio with above-average gross margin, investing in core platforms in key markets and focusing on the previously mentioned manufacturing logistic network optimization will all lead to enhanced gross margins. Those healthier gross margins will allow us to concentrate higher investment levels behind our most attractive portfolio sales to further strengthen.

Synergies will be partially used to improve our overall profitability, but also be reinvested into our competitive edge across digitalization and sustainability as well as into our disruptive innovation within our core businesses. With our strong leading brands, we already today create consumer pull, which will further increase based on our initiatives.

With our core portfolio of must stock brands, we can drive pricing, which in turn fuels our gross margin and allow us to start a positive growth spiral for Henkel Consumer Brands. Having shown you which levers we are going to use to get a healthier business with a strong focus on gross margin, let me now illustrate how we will reach our mid- to long-term ambition of an adjusted EBIT margin in the mid-teens.

Firstly, the current imbalance between the unprecedented increase in input cost and our selling price will normalize. Here, the positive growth spiral will have a strong contribution. Secondly, the synergies we are going to realize through the combination of the organization and the optimization of the supply chain network will contribute to the improved margin profile. On top, our active portfolio management focusing on growth and gross margins will contribute to an improved adjusted EBIT margin. Lastly, we are going to reinvest into growth initiatives, which will, in the mid and long term, also contribute to our profitability.

To sum it up, Henkel Consumer Brands will be stronger in a combined setup, building 1 business with increased scale, focus on attractive market sales with strong in-market positions. Strategic investment choices behind attractive market and category combination with above-average gross margin potential. Leverage substantial synergies from SG&A and supply chain to enable investments into profitable growth and deliver to our midterm profitable ambition. The merger provides the opportunity to actively manage our portfolio due to enhanced critical mass. Our new merged business creates a platform that facilitates acquisitions within and outside of our current consumer categories.

So with that, over to Carsten.

[Carsten Knobel, executive]

Thank you, Wolfgang. So within Henkel Consumer Brands, we will combine our strength in the consumer goods business and create 1 strong multi-category platform for future profitable growth, with significant benefits for Henkel for our teams, our shareholders and also our customers.

And under the leadership of Wolfgang, we will raise the bar and focus on brands and businesses with attractive growth potential and healthy margins. We'll expand our active portfolio management beyond the current level, and we will ensure that our customers will have 1 contact across all consumer categories.

And at the same time, we will create substantial synergies. We will use them to enhance our margin profile and to reinvest in our business to strengthen our competitiveness in important areas like sustainability, digitalization and innovation. Creating Henkel Consumer Brands is an important element to advance our strategic agenda to the next level. It will fuel both growth and profitability and thereby, it clearly contributes to our ambition to win the '20s through purposeful growth.

So let me briefly wrap it up. In the first quarter, we achieved a significant organic sales growth of 7.1%, driven by strong pricing. We are operating, as mentioned before, in a highly volatile business environment, the broad implications and unprecedented price increases for raw materials and logistics will also impact our business performance this year.

These fundamental changes are reflected in our updated outlook. Facing the drastic input cost headwinds, we are also stepping up our pricing initiatives across all businesses, and we are confident to recover our profitability over time. While managing our business in these difficult times, we remain focused on our strategic priorities, and we are driving the merger of our consumer businesses, Laundry & Home Care and Beauty Care with full force.

The creation of our multi-category platform, Henkel Consumer Brands will offer the clear benefits we've shown and will enhance our growth and margin profile. We will leverage significant synergies which we will use to increase our margin level and to strengthen the competitiveness of our Consumer business.

In the first phase, the implementation of measures by the end of 2023 will create around EUR 250 million of net savings on an annualized basis. And Henkel Consumer Brands will have a stronger basis to shape our portfolio. Here, businesses of up to EUR 1 billion of sales are currently under review for portfolio measures.

All in all, we are convinced that this is the right step to shape Henkel's future and to reaching our compelling mid- to long-term financial ambition. With this now moving on to the Q&A. And ladies and gentlemen, we are really looking forward to taking your questions. Thank you.

[Operator]

[Operator Instructions] The first question comes from the line of Guillaume Delmas from UBS.

[Guillaume Gerard Delmas, analyst]

Two questions for me, please. The first 1 on Q1 and the second 1 a more big picture. On Q1, I wanted to focus on Eastern Europe because with 21% organic sales growth in the first quarter, it seems that Eastern Europe was nearly half of your group organic sales growth in the first quarter. I think I'm getting to 44% gross contribution from Eastern Europe.

So as you exit your operations in Russia and Belarus, is it fair to assume that Eastern Europe will mechanically almost prove far less significant to your growth from Q2 onwards. And maybe this partly explains why at this stage, you haven't raised your top line guidance outlook for Beauty and for Laundry & Home Care? So that's my first question.

The second one is on the merger of your consumer businesses. You flagged in the presentation that in its first phase, the synergy will be mostly coming from sales and administration and as a result, I think you're mentioning around 2,000 jobs being lost. So my question here is you're not concerned that these measures will create additional uncertainty, anxiety for your employees?

And so ultimately, distract you even further from good execution and good innovation. So risk of instead of addressing your lack of top line momentum, these measures, at least in the short term, could exacerbate them. And I guess what I'm trying to get to is, if I look at the past decade, Henkel has always opted for cost-cutting, efficiency gains measures every time you've been facing operational challenges, but this approach has had very limited success. So why are you confident this time around it will work? And I guess what's different with the current plan relative to the previous one?

[Carsten Knobel, executive]

So Guillaume, I think let us start with the second question, which is related to the merger. And I think here, I will make it -- I make a short statement, and then Wolfgang will significantly more elaborate on these topics. For sure, you're right that a merger always creates anxiety and insecurity.

On the other side, it's clear -- and I think it's clear also for our people, if you merge 2 businesses that there will be an impact on jobs. And that the first phase with the EUR 250 million of net savings and that combined with roughly 2,000 -- around 2,000 jobs being impacted on that, for sure it's something where we will have, within the company, discussions. But I hand over now to Wolfgang to give you more details how he sees that going forward. Wolfgang?

[Wolfgang König, executive]

Thank you for the question, Guillaume. I think you're absolutely right, change creates anxiety and it's something that we cannot do anything about. It just happens. It's part of the human brain, we're not made for change. That said, we have to do what is right for the business. And when you look at the performance of our business in the recent years, I think not performing on par with your expectations also drive message anxiety within your organization and people in our teams are actually asking for a change.

And this topic is out for a long time, and I think it's overdue. So what is critical for us within that to not make it become a business risk is that we manage it in the right way. And we also believe at the end, ultimately, we will have bigger roles, bigger responsibilities, and it is a huge opportunity for us to bring down our kind of bureaucracy in the company and have people really focus on innovation, the way forward and really focus on the core categories.

So it's about taking out that complexity. And we are in very close contact with our employees. We have town halls, even after today's call, we will, and we'll try to remove it as much anxiety as we can quickly to not have it become a business risk and drive the utmost stability. And I think the last comment on that is, as you've seen, we still have Bruno Piacenza on my peer in place until the end of the year until the merger is completed to continue to drive the -- and execute our innovation plans and day-to-day business on the Laundry & Home Care business, and I continue to focus with my leadership team on Beauty Care, which hopefully helps us, and we see it right now that it has helped us to stabilize the organization. Thanks.

[Carsten Knobel, executive]

So Guillaume, to your first question to the performance of Eastern Europe and maybe the context of Russia, and Ukraine, let me maybe start overall. So Eastern Europe, you're absolutely right, we recorded a strong organic net sales growth of 21%, that was driven significantly by pricing while volumes were slightly below prior year.

We witnessed price increases in the double-digit percentage range for all business units led by Adhesive Technologies and Laundry & Home Care. Maybe that's, first of all, I would say, on the fact of Q1. Secondly, maybe I think to remind all of us, the impact Russia for the total company represents less than 5%, EUR 1 billion -- less than EUR 1 billion, slightly less than EUR 1 billion of turnover and the Ukraine less than 1%.

If we look into the performance of Q1 and first of all, Ukraine in the first 2 months, not but definitely in the month of March, were significantly impacted by the war with all our production sites and all our businesses to be closed. And by that, we experienced, in the quarter, a significant negative organic sales impact.

On the other side, Russia for sure, also performed. But less than what we have seen in the overall of Eastern Europe in terms of organic net sales growth. And I think that's how we see it in -- for the Q1. And maybe I hand over to Marco maybe to explain a little bit what we already explained last time, how we handled Russia or the exit countries of Russia and Belarus from an OSG perspective for the remainder of the year. Marco?

[Marco Swoboda, executive]

Yes. For sure, I can do that. So as Carsten said, I mean, the 21% that we see in Eastern Europe was broad-based across many countries, Russia being even clearly below that average. So going forward, we will exclude Russia from our OSG because we decided basically to discontinue that business and are now working on that exit that will happen in the course of the year, at least that's the clear ambition. So that's then how we have to look at that also in our guidance that we've just shown.

[Carsten Knobel, executive]

Guillaume, clarified with your questions?

[Guillaume Gerard Delmas, analyst]

Very good.

[Carsten Knobel, executive]

You're welcome.

[Operator]

The next question comes from the line of Iain Simpson from Barclays.

[Iain Simpson, analyst]

A couple of questions from me, please. Firstly, your EUR 500 million of gross savings, that's across both Phase 1 and 2, if I understood you correctly, with Phase 1 yielding EUR 250 million of net savings that implies a reinvestment rate of well below 50%, assuming a decent chunk of those gross savings will be in Phase 2.

So I just want to check, firstly, that's correct? And what gives you confidence you don't need a higher reinvestment rate on those savings given your market share picture has been pretty mixed in recent years? And then that's a related combination question you talk about targeted acquisitions once this is complete, would that potentially include strategic size deals? And then just finally, some housekeeping. Just wondered if you saw any risks to your logistics in China from lockdown in the second quarter, especially in Adhesives.

[Carsten Knobel, executive]

Marco, I propose you take the second one, the China one, and we start with this.

[Marco Swoboda, executive]

Yes, for sure. So on China, of course, we are all aware of the situation and the teams are actively working on business continuity like other companies currently do, in particular, in the Shanghai region. So what we can currently see and what we have factored into our outlook is basically that we see an impact on the top line, in particular, in our Adhesive Technologies business in the mid-double-digit euro million area. So that's what we currently assume.

[Carsten Knobel, executive]

So Wolfgang will take your first -- the first part of your first question with the savings, and I will make a short comment on your acquisition question.

[Wolfgang König, executive]

Iain, I think the way I understood your question, you got to completely right that the overall gross savings we're aiming to is EUR 500 million. And we specified for the first phase EUR 250 million in terms of net savings. As we said before, we're not kind of really specifying like the second phase net savings as we still -- which leads to a little bit into the second part of your question.

We still have not decided how much to reinvest out of the other savings elements. And the second part of your question was about if we need higher reinvestments given our market share situation? What I would say to that is that it's not just a question of overall investment or increased reinvestment behind our brands, it's a question of focus.

So when you look at the new strategy that I explained going forward, and you look at being more focused with the investments that we already have on our core categories that will allow us already to significantly increase our investments as we want to be more focused with what we do. And then a big part is not just saving SG&A to reinvest into the business, into A&P, it's also generating more gross margin by focus on the higher gross margin elements to then drive the positive growth spiral.

So I think this is what's key to understand within that new strategy. And yes, of course, we look for more reinvestments into the business, and we will specify the net savings for the second phase as well as potential reinvestments at a later point.

[Carsten Knobel, executive]

Yes, Iain, and to your third part or second part of your first question, the topic of M&A or targeted acquisitions. Yes, I think it's clear that at the moment, we are fully concentrated on implementing the merger. On the other side, you have seen with the acquisition of Shiseido the professional business to be precise of the Shiseido business in Asia, that we also take opportunities if they are important for our footprint.

And I think that was an important factor to strengthen or significantly strengthen our business in Asia in the professional business and by that, we decided to do so. And after the merger or after the significant part of the merger work is done, it continues what we have said before and nothing has changed on our M&A strategy.

That means we have a clear targeted criteria set up means strategic fit needs to be there, availability and financial attractiveness. And by that, we have 2 strong pillars, Adhesive Technologies on the 1 and Consumer Brands on the other side. And yes, in our thoughts are also strategic and big deals in order to grow and improve the size of our business, especially then also in the Consumer Brands business. I hope that clarifies.

[Operator]

The next question comes from the line of Tom Sykes from Deutsche Bank.

[Tom Sykes, analyst]

Firstly, could you maybe give a view on what the actual in-year savings in 2023 would be the net savings in Phase 1? And then just on the split you gave of contract manufacturing, warehousing -- sorry, and your own in-house manufacturing, what does a good business in your view look like at the end of this process? And why are there at the moment, no cost associated with that given the months of planning that you've had on and the answers that you can give on Phase 1, please?

[Carsten Knobel, executive]

Okay, Tom. So I propose, Marco, you take the first one, when it comes to the savings/how the phasing of the savings is and Wolfgang to take the 1 regarding supply/contract manufacturing production in terms of Phase 2, at least that's how I read your question, Tom.

[Marco Swoboda, executive]

So then let's start with phase 1, where we target the organizational measures to start very soon. We said we want to get that done until beginning of 2021. So that means also a majority of these savings we expect in 2023 and then a remainder, in particular, on an annualization effect in 2024.

[Wolfgang König, executive]

Tom, let me take the second question around supply chain. So I think, first of all, I think it's a very obvious savings and synergy area look at your supply chain and your manufacturing footprint overall. We've operated our 2 supply chains broadly completely separate for the last couple of years from a manufacturing point of view as well as how we managed co-manufacturers and co-packers, as I mentioned in the presentation.

It will take us a little bit of time to really build that ideal supply chain network from a logistics as well as manufacturing point of time -- point of view. So that's why we said we'll need the time up until the end of '25 in order to complete that.

You ask what for me a perfect supply chain would look like? And I think I mentioned that in the site sentence in my presentation, a perfect supply chain for the combined business will look like 1 truck to the customer, which will have significant elements of synergies for us as well as for our customers from an ease of doing business, and we are far away from that today.

So this is why this is one of the major areas we need to look into, 1 truck to the customer, 1 invoice, 1 order and streamlining that whole process, which will also help us to have more supply security in all of our regions across the board as we go on that journey. I hope that clarifies the question, Tom?

[Tom Sykes, analyst]

Yes. And sorry, just a quick follow-up. On the amount of contract manufacturing that you have, obviously, it's a high proportion in Beauty, but what is the amount of sales that you have from contract manufacturing -- or provided by contract manufacturing at the moment, please?

[Wolfgang König, executive]

I do not have that number present, to be honest. We can essentially follow up with that, but I do not have that top of my mind, but it is also very different between Beauty Care and Laundry & Home Care. And of course, in the Professional business, we have much more complexity, so we have very high gross margins in that business, but an enormous potential to in-house some of those volumes over time to further drive our gross margins. But I will not comment on the specific sales connected to it. I hope you understand.

[Operator]

The next question comes from the line of Jeremy Fialko from HSBC.

[Jeremy Fialko, analyst]

Jeremy Fialko, HSBC here. First question is on that little margin bridge you presented because clearly, your margins in consumer have to kind of approximately double in order to get this mid-teens target. So could you give a little bit more detail on the respective size of those kind of different building blocks? Say, for example, just getting the pricing aligned with your costs, how much that would be delivering kind of in particular just perhaps a bit more context on kind of ranking those blocks in a bit of order?

And then secondly, the comment on the EUR 1 billion of portfolio measures, can you clarify, is that incremental to everything that you have talked about so far, so for example, including the Beauty discontinuations this year? Or is it included within -- so again a bit more clarification on that point?

[Carsten Knobel, executive]

Maybe we start with the second one. So the portfolio, I think, as you know, we -- in March 2020, we announced the EUR 1 billion under review with half of that being in a turnaround cluster and half of that being in a phase of to be discontinued or divested. And you heard us talking about that at the beginning of 2022 when we made the kind of a wrap-up of that, and we exactly came around to this EUR 0.5 billion of divestment and discontinuation business.

Then we announced at the same time in February for Beauty Care, additional EUR 200 million of measures in terms of decided and to be implemented discontinuation and stopping of businesses in the course of 2022, which are part of the EUR 1 billion, which we are now having under review.

And so therefore, you also heard Wolfgang talking about that we are raising the bar, what is the business to be part of Henkel. So therefore, that's new compared to the approach we have done before. So a significant part of the EUR 1 billion is new. The EUR 200 million we have already announced, but that's already a part of Wolfgang's strategy to drive Beauty Care and then in future, the consumer business.

And on the other side, for sure, there is EUR 0.5 billion, as we discussed or said which was under turnaround. And this, for sure, we are monitoring. And if things changing, then as it is then it could be also part of that, and we will specify that going forward while we are talking. And regarding to the margin blocks, I think Wolfgang was talking about that, Marco, you will take it or I can also do it, but you do it, Marco?

[Marco Swoboda, executive]

Yes. So I mean on the margin blocks, obviously, we haven't yet specified it. I mean that is something we're going to work out further while we progress. But also, of course, we announced already the first phase net savings ambition that we have. So that is obviously quantified and that's a part of it. And on the other buckets, we will come back to that as soon as we can and where we progress.

[Operator]

The next question comes from the line of Chris Pitcher from Redburn.

[Chris Pitcher, analyst]

Could I follow up on the brand discontinuation question. On a quick calculation, I mean, the dilution from those brands could be as much as half of the gross cost savings. Could I confirm that's the sort of level?

Because following on from Iain's earlier question, I think in 2023, this leaves limited room for the growth investments that you're talking about. And then following on from that, can you give us an idea of what the marketing to sales ratio for the combined Consumer Brands division looks like and whether Wolfgang thinks that is competitive?

And similarly, on R&D, can you give us an idea of what you think a sustainable level of competitive R&D is because last year it looks to have been distorted by some technology impairments in Beauty? And do you think the merger is going to get you better return on your R&D in terms of innovation pipe?

[Carsten Knobel, executive]

Good. Chris, I think Wolfgang will start with the topic of marketing and the sales ratio and also R&D and then we come back to your brand discontinuation question.

[Wolfgang König, executive]

Chris, let me just basically take your questions backwards from the last 1 and more of your comments around R&D. R&D is a very integral part of our business, and it's instrumental for consumer goods business like ours, especially with the 2 global core categories that I've clearly been talking about when you look at Hair Care and the technology approach we have in there, especially when you look at categories like Coloration and the same is true for Laundry & Home Care.

So combining 1 R&D organization also within the SG&A space gives us significant opportunity to streamline a little bit like more of the bureaucracy elements of the R&D element, while at the same point in time, we do not have a very high savings target for R&D. Meaning, we save underproportional in that space and reinvest some of the resources and some of the efficiencies and synergies we generate by combining R&D and reinvest it back directly into researchers and more focus on the categories that we've decided to invest behind. So I do think that we move much more towards a very competitive spends in our R&D space with that change. So that's the first one.

Second 1 is around Line 17. So I hope you understand that I'm not going to disclose any specific A&P investment numbers. But yes, I do see it as a much more competitive spending level that we will be able to have. In the core categories, we will focus our main investments in the future, again, which comprises of Hair Care and Laundry & Home Care.

And I think this is a key element. And as I said before, it has a much higher gross margin on an average by about 300 basis points, which will allow for more investments as we overproportionately start growing that business versus the noncore part of the business. And with that...

[Carsten Knobel, executive]

Maybe, Chris, I add only 2 points because you also alluded to the depreciation of the R&D investment. I think that was a clear attempt to create new technologies with buying it from the outside. And I think you need to take these kind of risks at a certain point of time. And it has not materialized to the way we thought, but it has no impact on what Wolfgang has alluding to, to our spendings, in general, on R&D.

And you also heard him talking that looking into the EUR 250 million savings, R&D is definitely not in the focus of doing so. And you also know that in the beginning of 2020, we stepped up our investments in terms of digitalization, IT and marketing, and as we have said during the course of the last 2 years, in general, this is a new level which we reach, which we believe, in general, is appropriate.

But for sure, as we alluded to that we will take out of the savings what we're having also part of supporting specific investment needs where it is going forward. And we have a lot of things in the field, be it sustainability, be it digitalization and driving the growth of our business. Second part was, again, to the -- was another 1 to the brand discontinuation. Marco, you can comment on that.

[Marco Swoboda, executive]

Yes, I can do that, Chris. So obviously, the question was around brand discontinuation and the impact it has on the cost savings or the relationship. So first, I mean the brand discontinuation is very important for us from a portfolio management perspective.

We need to get to a more healthy gross margin levels in the Consumer business and that very much contributes to that. We also will take out complexity, for example, on the SKU level out of it, which will also support then the ability to restructure also our supply chain, as we talked about earlier.

So there are a couple of elements around that. But of course, I mean, some of the cost savings will also help looking at it very isolated will also help reducing stranded costs out of these discontinuations or divestments. But as I said, that's a very isolated view. On the other hand, we also need to see that we have also clear growth objectives.

We want to also grow the top line organically, but also we're going to do that by way of acquisition and with that also help offsetting a bit of the scale loss that we may have from the discontinuations or divestments. So we have to look at that altogether, and we think with that, it's the right mix of measures and that we work through.

[Operator]

Thank you, ladies and gentlemen. I will now hand over to Mr. Knobel for his closing remarks.

[Carsten Knobel, executive]

So first of all, thank you for your questions, and let me wrap up today's presentation with a brief summary of the key points. We delivered a significant organic sales growth in the first quarter on the basis of strong pricing. We achieved this performance in a business environment which was highly volatile and faced unprecedented developments.

And as a consequence, we updated our outlook last week. It now reflects the broad implications from the war in Ukraine as well as the drastic acceleration of prices for raw materials and logistics. We are driving the merger of our consumer businesses, Laundry & Home Care and Beauty Care with full force. And in the future, Henkel Consumer Brands will form our second strong pillar next to our successful Adhesive Technology business.

We are shaping our multi-category consumer platform, which will, with that, create significant synergies and elevate our growth and our margin levels. So in a more challenging environment, our priorities are clear. Besides managing our business performing, we remain focused on our clear strategic focus areas. And based on our strong foundation and the clear agenda, we are confident to master the challenges that lie ahead of us, deliver on our mid- to long-term financial ambition and create purposeful growth.

So before closing our call, let us take a look at our upcoming events. Already end of January, we had announced to host the Capital Market Day this year. And today, I would like to invite you to save the date. It is September 20. On that day, we will provide a deep dive into both of our future businesses, Adhesives Technologies and Consumer Brands.

We look particularly forward to meeting you in person here at our headquarters in Düsseldorf. More details on our Capital Market Day will follow in due course. Our next event will be the publication of our half year results mid of August. With this, I would like to thank you for joining us today and for the call. Take care. Stay safe and also stay healthy. Thank you. Bye-bye.

[Operator]

This concludes today's conference call. You may now disconnect.