Henkel AG & Co KGaA

XETRA:HEN3

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, and welcome to the Henkel Q3 2022 Conference Call. With us today are Carsten Knobel, CEO; Marco Swoboda, CFO; 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, we will briefly mention your name and the company you are representing.

At this time, I would like to turn the call over to Mr. Knobel. Please go ahead, sir.

[Carsten Knobel, executive]

Dear, investors and analysts, good morning from Dusseldorf and a warm welcome to our conference call on the Q3 results. Thank you for joining us. And also today, I'm here with our CFO, Marco. Together, we will talk you through the key aspects and also answer your questions.

Before we start, I would like to remind everyone that this presentation which contains the usual forward disclaimer to forward-looking statements within the meaning of relevant U.S. legislation can be accessed via our website at henkel.com/ir. The presentation and discussion are conducted subject to this disclaimer. And as always, I will not read the disclaimer, let me take it as read into the records for the purpose of this conference call.

Now let's get started with the key topics of today's conference call. We achieved a strong Q3 performance with a double-digit sales increase, resulting in an all-time high quarterly nominal sales. And as you have seen this morning, we updated our outlook for the full year. Based on our continued strong performance, we raised our expectations for both sales and earnings.

So kicking it off with our Q3 performance at a glance. On a group level, we achieved organic sales growth of 11.3%, driven by price, with nominal sales of around EUR 6 billion, we reached an all-time high for the quarter. Performance was backed by all 3 business units, the strongest contributor being Adhesive Technologies. Here, we recorded a strong double-digit organic sales growth of 16.8%, reaching EUR 3 billion in nominal sales. Beauty Care recorded organic sales growth of 0.9%. For sure, also impacted by the continued implementation of the announced portfolio measures, which we also allude later during the presentation.

And in nominal sales and terms, we reached EUR 1 billion of sales. Laundry & Home Care delivered an organic sales increase of 7.3%, reaching EUR 1.9 billion in nominal sales. Growth was particularly driven by the Laundry business area. This performance is the result of a strong team, which has been managing our businesses in a highly challenging environment. Our business environment continues to be characterized by a board-based inflationary development and the level of volatility and uncertainty has not eased.

On the macroeconomic level, forecasts predict lower growth dynamics. While dynamics in input cost prices have somewhat slowed down more recently, they continue to be at elevated levels. For example, prices for crude oil, palm kernel oil or paper are still significantly above prior year. So our expectation of an average mid-20s percentage increase for the full year compared to 2021 is still valid. In parallel, against the backdrop, of the development of the war in Ukraine and the uncertainty around potential gas shortages, especially energy prices in Europe have recorded sharp increases, also impacting upstream supply.

Moving to industrial production. Industrial production proved to be robust overall. Automotive production showed a clear recovery. In certain segments, we saw that dynamics are slowing down slightly month-over-month. However, still remaining on high levels. This is the case in areas like construction or furniture. The consumer side effects from a normalization versus higher, respectively, lower COVID-related shifted demand patterns are largely fading out. Only in some categories, for example, in Home Care and in Hair Styling, we continue to see a certain normalization impact. Also, the hair salon market showed a further improvement.

In light of increasing prices to offset the drastic input cost headwinds, elasticities in the consumer markets have been increasing. For sure, we will closely monitor these developments also going forward, and we will continue to follow a balanced approach, adjusting prices in a responsible way to reflect inflation. While managing our business in this highly challenging environment, we continue to drive our strategic priorities with full force. We provided a more extensive overview on our purposeful growth agenda during our Capital Markets Day in September. This is why today, I would like to highlight just a few proof points to showcase some of the progress we made.

For sure, our very strong sales performance in the third quarter shows how we are navigating successfully during these unprecedented times. And I mentioned it before, we further accelerated pricing across all businesses and regions to compensate for the input cost increases from raw materials and logistics with success. Coming from the pricing at 9.4% in Q1 and 11.2% in Q2, we are now at the level of 14.7% for the group.

The teams keep on driving relevant innovations for our markets in order to fuel further growth. Just a few examples. In Adhesive Technologies, we launched the first water-based high-speed and high-volume Loctite threat locker solution for a broad range of use cases in the automotive industry.

In Beauty Care, we launched SalonLab&Me, the first B2B2C hyper-personalized professional hair care brand. And in Laundry & Home Care, we further rolled out our innovative Persil Eco Power Bars. And at this time, we execute on the merger of our consumer businesses, and we are ahead of plan. The new consumer brands organization is live in all regions, except for Europe, but also here. We made further substantial progress in the implementation of the new organization over the last couple of weeks.

And beyond organic growth, we continue to pursue attractive M&A opportunities in the third quarter. We successfully closed 2 acquisitions of Term Exit and NBD Nano in our Adhesive Technologies business, adding further competencies in innovative server management solutions and surface technologies. And of course, we maintain our strict cost discipline and drive further efficiency gains in supply chain procurement and SG&A.

So to wrap it up, a strong performance in a more than challenging environment. And based on this continued strong trajectory, we raised our guidance for fiscal year 2022 today for both top and the bottom line. On group level, we now expect organic sales growth of 7% to 8% and an adjusted EBIT margin in the range of 10% to 11%. We also increased our adjusted EPS growth expectations now to a range of minus 25% to minus 15% at constant exchange rates, reflecting our strong top line performance, our initiatives which are bearing fruit and the fact that Russia is still contributing to our earnings. With this, building on our strong performance year-to-date, our updated outlook expresses that we are looking at the full year 2022 with even more confidence.

With that, I would like to hand over to Marco for a more detailed look at our Q3 numbers and the updated outlook. Marco, please?

[Marco Swoboda, executive]

Yes. Thanks a lot, and good morning to everyone on the call also from my side. Building now on Carsten's comments, let me highlight the drivers of group sales performance in the third quarter. The double-digit organic sales performance of above 11% was driven by strong pricing across all business units. And as a result, pricing was close to 15%, while volumes were minus 3.4% below prior year level. M&A slightly decreased sales, and in contrast, FX effects were a tailwind. As a result, nominal sales came in at around EUR 6 billion-plus of 17.3%.

Looking at the development in the different regions. Again, the emerging markets were a strong growth driver, with organic sales growth of 18.6% and all regions contributing to this good performance with clear double-digit growth rates. In the mature markets, we achieved a very strong performance of 5.6%.

Moving now on to the business units in more detail. Starting with Adhesive Technologies, which was the main growth driver in the third quarter. Here, we achieved a strong double-digit organic sales growth of around 17%. This results in nominal sales of close to EUR 3 billion in the quarter. The continued strong growth momentum was driven by pricing of 15.8%, another incremental step-up compared to the first half of the year and against already high prior year comparables. Important to note, we also recorded slightly positive volumes. The organic growth was driven by all business areas.

In Automotive & Metal, we achieved significant double-digit growth across all businesses, also against a weak prior year quarter. Here, the global shortage of semiconductors affected our automotive business, however, to a lesser extent compared to previous quarters.

Packaging & Consumer Goods continued its strong growth momentum and recorded now 6 consecutive quarters with double-digit growth. Here, the Consumer Goods business recorded the strongest increase.

The Electronics & Industrials achieved significant organic growth, particularly driven by double-digit performance in the Industrials business.

And in Craftsmen, Constructions & Professional, we also recorded significant organic sales growth. The General Manufacturing business reached double-digit growth, Craftsmen & Professional increased significantly.

In the Construction business, we saw that growth dynamics started to slow down, yet still at higher levels. As a result, the business posted positive growth. From a regional perspective, we have quite a unique picture. All regions posted double-digit organic sales growth. All emerging markets posted strong double-digit growth rates. The development was particularly supported by the Packaging & Consumer Goods and Automotive & Metals business areas.

When it comes to the mature markets in Western Europe and North America, Automotive & Metals achieved the strongest growth. Double-digit growth in the mature markets of Asia Pacific was particularly driven by the Electronics & Industrials and Packaging & Consumer Goods business areas.

And now on to Beauty Care. With pricing of 11.7%, we were able to overcompensate for the decline in volumes. Roughly half of the volume decline resulted from the continued implementation of the announced portfolio measures. Besides increasing elasticities in light of an overall inflationary environment, volumes were partially also affected by trade negotiations. Overall, the business unit posted organic sales growth of 0.9%.

Looking at our Beauty Consumer business, we recorded overall positive organic growth driven by double-digit pricing. This could, as mentioned, more than offset lower volumes due to the portfolio measures and elasticities. Overall, the hair cosmetics category recorded very strong growth, supported by all businesses. Our Styling business continued its recovery path from the pandemic-related decline with double-digit organic sales growth. And the Colorations & Care businesses recorded strong growth, particularly driven by the emerging markets.

Body Care was below the prior year level, mainly impacted by the announced portfolio measures. The Professional business continued very positive development of the first half year and posted good organic sales growth. This performance was particularly driven by a double-digit increase in the emerging markets. Looking at the regional performance, Beauty Care achieved significant organic sales growth in the emerging markets while mature markets were overall below prior year.

In the emerging markets, the regions of Asia Pacific, Eastern Europe and Latin America each posted double-digit growth while Africa Middle East recorded a negative development, in particular as a result of the portfolio measures. Organic sales growth in the mature markets was overall below the prior year level, mainly due to a negative development in Western Europe and North America. Contrast, mature markets in Asia Pacific achieved a significant organic sales growth increase.

On to Laundry & Home Care. The business unit delivered significant organic sales growth of 7.3% in the third quarter. Pricing of around 15% more than offset the decline in volumes resulting from broad-based elasticities, ongoing trade negotiations and further demand normalization in certain home care categories as well as due to some effects from our portfolio optimization measures.

Growth was mainly driven by the Laundry Care business area, which posted a double-digit plus. Main drivers were the heavy-duty detergents and special detergents categories, which both achieved double-digit organic sales growth with strong contributions from our core brands, Persil, all and Perwoll.

Home Care showed an overall flat development. As mentioned earlier here, we still saw a certain normalization from last year's COVID-related consumer demand. And this impacted the hard surface cleaner and toilet care categories, which subsequently recorded a decline. On the other hand, the dishwashing category with our brand families Pril and Somat, achieved a continued strong performance.

Emerging markets overall grew double-digit in the third quarter with double-digit growth rates in each Africa/Middle East, Eastern Europe and Latin America while the emerging markets in Asia Pacific recorded a decline. The mature markets achieved overall good organic sales growth. North America delivered good growth, and that showed the third consecutive quarter of organic sales growth. Western Europe recorded a stable performance. The mature markets of Asia Pacific achieved significant growth.

With this, let us move on to our outlook for the full year, which we updated today. While we continue to operate in a highly challenging market environment and against the background of our continued strong performance in the third quarter, we raised our expectations for both sales and earnings. On group level, we now expect organic sales growth in the range of 7% to 8%, up from 5.5% to 7.5%. Breaking that down on business unit level, we have raised our expectations.

For Adhesive Technologies, we now foresee organic sales growth of 11% to 12%, up from 10% to 12% previously. For Beauty Care, we expect minus 1% to 0% compared to minus 3% to minus 1% previously. And for Laundry & Home Care, we guide for organic sales growth of 5.5% to 6.5%, up from 4% to 6%. We also updated our expectations for profitability now expecting an adjusted EBIT margin of 10% to 11% for the group compared to 9% to 11% before.

Also here, this is driven by increases for our business units. We now guide for 13.5% to 14.5% for Adhesive Technologies versus 13% to 15%. For Beauty Care, we now expect an adjusted EBIT margin in the range of 7.5% to 8.5% compared to 5% to 7% before. For Laundry & Home Care, we now expect 8% to 9% versus 7% to 9%, respectively.

And we also increased our adjusted EPS growth expectations to a range of minus 25% to minus 15% at constant exchange rates, reflecting our strong top line performance, our initiatives, which are bearing fruit and the fact that Russia is contributing to earnings longer than initially received.

And with that, handing back to you now, Carsten.

[Carsten Knobel, executive]

Thank you, Marco. So let me briefly summarize. We delivered a strong performance in the third quarter. We achieved organic sales growth of 11.3%, driven by further pricing across all business units and all regions. And with nominal sales of around EUR 6 billion, we reached an all-time high for the quarter.

We achieved this strong sales performance in an environment which remains to be highly challenging. We have been facing drastic headwinds from raw materials and logistics and increasing energy prices, in particular here in Europe. The overall inflationary environment continues to be highly volatile and also uncertain. And for sure, we will continue to follow a balanced approach, adjusting prices in a reasonable and responsible way to reflect inflation.

Nonetheless, while managing our business, we keep on driving our strategic priorities, with tangible progress. We launched relevant innovations to the markets to fuel future growth. We are ahead of the plan with the merger of our consumer businesses. We closed 2 compelling acquisitions in our Adhesive Technology business. And also beyond that, we are implementing our purposeful growth agenda with full force. Based on our continued strong performance, we updated our outlook for 2022 today and raised expectations for both sales and earnings.

And with that, let us move on to the Q&A. Marco and myself are now looking forward to take your questions.

[Operator]

[Operator Instructions] Our first question today comes from Iain Simpson of Barclays.

[Iain Simpson, analyst]

Two questions from me, if I may. Firstly, could you just remind us how we should think about the likely impact of Russia exit on sales and earnings? Because obviously, currencies moved around quite a lot and whether there's any sort of updated time line as to when we should expect that?

And secondly, if I could, you've talked about the integration of Laundry and Beauty proceeding ahead of plan. One of the benefits you flagged that integration is that it would give you additional sort of strategic flexibility to change the portfolio there.

Could you just remind us, given that it looks to be coming in ahead of plan, at what point you will have done the necessary work to sort of unlock that strategic flexibility and when we should expect you to have the capability to take another look at the portfolio should that become appropriate?

[Carsten Knobel, executive]

Yes. Thank you, Iain. Thank you for your questions. I think we start with the Russia one and Marco, will you take that?

[Marco Swoboda, executive]

Good morning, Iain, also again from my side. So impact of Russia. So when we look at the exits that we announced in April, we assumed that, that will also have an impact on our EPS. So maybe starting with the earnings side. Back then when we updated our outlook in May, we said from the change in the EPS outlook approximately 6% to 7% of EPS decline is attributable to Russia.

And back then, that was approximately for 9 months. So that gives you some sort of quantification on the bottom line. And on the top line, basically, Russia in the past made around 5% of group sales. and that was the level of activity then. And that, of course, will go out, and we still strive for closing that end of the year. I don't think it will be earlier.

And of course, due to all the uncertainties and particularly on the regulatory side, that may drag a bit into the beginning of next year. But our ambition is still that we get that finalized at the end of the year. That is currently the status and we are in an active process, as you know, on that which is running relatively well and a lot of interest in that. And so far, we are still targeting to close the end of the year. And the only caveat is the regulatory approval that is hard to predict.

[Carsten Knobel, executive]

So thank you, Marco. I hope Iain, that helps. Coming to your second question, the integration question related to our Consumer businesses. Maybe let me start with giving you a broader scope.

So in January, we announced that we plan to have our new organization ready latest for the beginning of 2023. In the meantime, we made really great progress, and the organizational setup in all the regions, except for Europe, is already up and running. And in Europe, also here, we made good progress because negotiations and alignment with the code domination bodies at regional and local levels are really well underway, and this necessary step in Europe is now almost accomplished. And I'm also happy to share that we also found already a good solution for Germany. In France, we are still working on it.

So meanwhile, we have here already set up and announced the European Consumer Brands organization structure, the ExCom, their teams especially also in the areas of marketing, sales, R&D. And most countries have also established their local organizations, and our aspiration is to complete the first step of the transformation process in the region as planned by the end of the year.

And I think, Iain, I think we need to see that also in the context because we were at the beginning, also ask in terms of does it interfere our business? And if you in parallel look on the performance, what we are currently seeing also with the update now of our outlook in terms of increasing in sales and in profitability, it clearly shows that we are able to do both continuing our business, optimizing our business and at the same time, merging and bringing the new organization to life.

Your specific question on top was related more than to portfolio topics, and I think it's also clear that we need to do on the one side step by step. At the other side, we're doing in parallel things because we announced the portfolio steps related to our Beauty Care business at the beginning of the year with this around EUR 200 million of sales or 5% of the Beauty Care sales. And as Marco told it, we're making good progress on that also after 9 months. At the same time, we are also doing a portfolio discontinuations and optimizations in the Laundry & Home Care business. And I think that's in parallel.

And on the other side, I think that's clear that we want to actively shape our portfolio going forward. And first of all, it is about talking about the healthy core. And then by that further driving our gross margin before we also expanding the business. And I think here, we made good progress in terms of prioritizing the core and the profitable business sales and deprioritizing others, which you also see reflected in our results in -- I think we saw it already in the first half. You know that we are only commenting today on our sales performance, but we have also continuously seen especially now in the Beauty Care business that our portfolio measures related to this EUR 200 million I mentioned before, already showing impact on our GP1 margin also year-to-date, that means also continued in quarter 3.

And in the second step, we will focus now how we can expand the consumer platform either via M&A or we are also organic growth. And here, with a clear focus on higher gross margins for a healthier portfolio overall. And I think that's where we are standing. And I hope that helps you a little bit to put the things in perspective.

[Operator]

Moving on to our next questioner, which is Bruno Monteyne of Bernstein.

[Bruno Monteyne, analyst]

Price elasticities are clearly a bigger part of the story of volume declines this period. And then trying to understand a few things, if you look at the trending of how price elasticity started to impact you, is it materially worse towards the back end of quarter 3 and how does it go into quarter 4? And related to that, if you were to see too much market share losses because of this price elasticities, at what point would you decide to reverse the price increases if the volume losses get too big?

And my second question is around pricing, how far are you through the pricing cycle? I know it always takes a little while to catch up on pricing. Would it be right to think about 80%, 90% end of the pricing you would have been wanted to do?

[Carsten Knobel, executive]

Yes. Good morning, Bruno. Yes, very relevant question. I will start with the first one. So if we, and I try to bring it into a broader perspective also here, partly for sure, also, we alluded to that during that, but maybe I will repeat on that.

So in our Consumer businesses, we witnessed strong price increases, while volumes declined in that way, broad-based. However, in relation to the strong pricing and excluding the impact from the announced portfolio measures in Beauty Care and also partly in Laundry & Home Care, volumes from my point of view, showed an overall solid development also in comparison to the market, and I will also bring more transparency or more clarity on that. Maybe we start with looking at the Beauty Care business.

So let me put that into comparison. So overall, volume being impacted or being down by minus 10%. Half of that negative volume development in Beauty Care is related to the announced portfolio measures the EUR 200 million at the beginning of the year, and I mentioned it just before that we are progressing in that part -- in line with our plan, what we're having.

The remaining 5% points are also driven by impact from trade negotiations, where and which were a conscious choice from our side to compensate for headwinds and by that impacting, for sure, also some shelf impacts at the shelf. So -- and with other words, so less than 5% is due to elasticities from higher pricing. And if I would compare that now, which was happening with our peers, I would call that comparable. If I look on numbers, they have provided or they have reported.

If I move to the Laundry & Home Care business, here, we see that volumes are down roughly 7%. Also here, the discontinuation of portfolio measures, which we have been executing is for the quarter of a magnitude of around 1.5%. That means that's the first part.

The second is also here. The negotiations with the retailers, and I've already mentioned it a conscious choice to pass on headwinds in that part, which are related to our raw material and logistic increases.

I think here, we have an additional point or a specific point in Laundry & Home Care, which is the Home Care segment because here, we have to consider that the volume development compares to quite a high baseline in the prior year period, which is related to COVID, and I mentioned that in my speech at the beginning that from a negative point of view, that is related to Home Care. From a positive point, it is related to the Styling situation.

And by that, in line with the statement on Beauty also in Laundry & Home Care, there's less than 5%, which is due to elasticities from higher pricing, which, from my point of view, again, looking at numbers is comparable to competitors. If I take some numbers, what I've seen is minus 4%, minus 3%, minus 13%, minus 8%. So I think in that context, it is comparable, which brings me to, at the end, your last part of that question in terms of how are we balancing pricing volumes also with market shares.

And if we look overall in our Beauty Care and our Laundry & Home Care business, year-to-date, our market shares on a worldwide level are for both segments on a stable business. So that means that I think we have found, at this point, the right or a sufficient, a balanced approach between volume, pricing and market shares. So that's I would say, for the first, I would say, quite detailed now from my point, but I have also seen that in the discussions, I think that is quite an interesting or an important topic to mention.

Now from a pricing point of view, maybe to understand and to give you also here, Q3, we have seen double-digit pricing of 14.7% on the group level, which was driven by all business units, 16.8% from Adhesives, 11.7% in from the Beauty Care part and 14.8% for the Laundry & Home Care business.

If we look for the full year 2022 and what we have also reflected in our outlook is that for adhesives, here, we faced a high uncertainty with the economic indicators being revised downwards recently.

On the other side, still on a very high absolute levels. And raw material prices are still at elevated levels, therefore, we expect to continue increasing prices selectively. And at the same time, higher price levels towards the end of 2021 will lead also to lower carryover pricing for Q4 because we started quite significantly with pricing impacts already at the end of last year.

And moving to Beauty and Laundry. Here, we expect that we have a continued strong price component and also volumes will continue to be below prior year in that context. In Beauty Care, as you know, the negative volume development will also again be stronger impacted than in the Laundry & Home Care business by the announced portfolio measures.

I stop here, and I hope I could clarify some of your points.

[Operator]

Our next question now comes from Guillaume Delmas of UBS.

[Guillaume Gerard Delmas, analyst]

Two questions for me, please, both on the -- in your guidance, a bit following up a little bit on what you were just saying, Carsten. Because when I look at your updated organic sales growth outlook for the year, it seems to imply a pretty significant deceleration in Q4. I mean I'm getting to at best, low single-digit organic sales growth in Q4. So I was wondering what is warranting this caution, given that I would imagine you're still going to have a strong pricing tailwind, maybe not as significant in a thesis, but still a strong pricing tailwind in Q4.

And so my question here is are you being prudent because of the volatile and uncertain environment? Or are you already seeing some deterioration or accelerated deterioration in volume trends across the board in the last few weeks or last couple of months?

And then my second question is on Adhesives margins. Again, here, you have lowered by 50 basis points of your margin guidance. And can I...

[Carsten Knobel, executive]

Guillaume, the line is -- we can't understand you anymore.

[Operator]

I think we just have lost the connection to Guillaume there. So would you like to move on to next questioner?

[Carsten Knobel, executive]

I propose, yes, we move to the next one, and if Guillaume comes in, then we go back to his questions because otherwise makes no sense to answer and then he's not there. So maybe we go to the next one.

[Operator]

So up next, we have Christian Faitz of Kepler.

[Christian Faitz, analyst]

Yes. Two questions and congrats on the sales performance in Q3. My first question is on down trading. Do you see this in your Consumer care portfolio at present, i.e., going from Persil down to Viva or something like that or even to private label brands? Can you maybe comment on that trend?

Second, I was positively surprised to see you reporting about double-digit growth in electronics, industrials within mature Asia in adhesives. This goes against anecdotal part of a slowdown in overall electronics, but also industrials. Are you gaining share? Or is this also driven by electronics, gear to automotive with semiconductor availability improving?

[Carsten Knobel, executive]

Good question. Then let's start with your first question taking the environment into account. So with our differentiated and broad-based brand and product portfolio, I think we are able to cover different price points. And by that, also different price sensitivities. And I think we feel -- we are really very -- we are good or well positioned related to that trend or to that development in our Consumer business. If we look in detail, private label shares is increasing, in particular, in Western Europe, while it is rather stable in North America. And in that context, we also witnessed some signs of consumer down trading lower price points, for example, in the heavy-duty detergents in Laundry & Home Care.

And I think what I mentioned before, we will continue to follow here a balanced approach, on the one side, adjusting prices in a responsible way to reflect the inflation on the other side, looking in parallel on the behavior of consumers related then how it is reflected in our market shares to have here a balanced approach.

And further pricing as well as the overall increasingly inflationary environment might have an impact on our -- on the consumer behavior going forward. I think we are prepared with our portfolio on that. And as I mentioned it before, taking a look on our global market shares in both segments in Beauty and in Laundry & Home Care, they are stable in that context. So that's for your -- regarding your question on the portfolio, especially on Laundry & Home Care.

To the other part, Electronics and the business performance in that context, the Electronic business as Marco was alluding to showed a very good growth in quarter 3. And this was driven by a very strong growth in our consumer device business, thanks here to winning projects at our customers, which is an indirect answer of when you ask, are you gaining market shares, which is an answer of yes, in that context or in that segment?

And also, our semiconductor business also showed a very strong growth. And yes, from a market perspective, the demand in semiconductors for consumer electronics remained on the one side below prior year, while industrial and automotive semiconductors recorded a higher demand and more details, I ask here for your understanding, I'm not willing to record or will tell you on the regional level. But I hope it overall clarifies your questions. Is Guillaume back in the call?

[Operator]

He is not connected as of yet.

[Carsten Knobel, executive]

Great, then we go to the next one, to the next question.

[Operator]

So we're now moving on to Celine Pannuti of JPMorgan.

[Celine Pannuti, analyst]

Well, I had a similar question on your implied Q4 volume performance, which would imply Q4 given what you said that volume will be worse in Q4 than Q3. Now I understand that some of the impact of your volume in Laundry & Home Care and Beauty are due to retailer negotiations. So is this going to continue in the fourth quarter? And what is going to get worse in terms of volume in the fourth quarter?

And then my second question on cost inflation, you mentioned that you still stick with your guidance for this year. That's fine. I just want to understand how you look into next year. I mean one of your competitors have been talking about still high cost base, at least in the first half of the year. Are you as well seeing this? And any impact as well from a regional standpoint where our costs in Europe are still quite elevated.

[Carsten Knobel, executive]

Celine, so good morning. I will start with your, the question of outlook/Q4, and Marco will then comment on the cost inflation.

So again, taking now a look on the overall company and looking at the individual businesses. So as we have said, and you have seen Adhesive Technology achieved a very strong top line performance with a double-digit growth in the quarter. Now in quarter 3 with was 16.8% driven by double-digit pricing and a positive also volume effect. Based on the drastic input cost increases throughout the year, we expect to see a continued strong pricing component also for the remainder. However, prior year comparables, I mentioned that for pricing will increase significantly in Q4 because of the activities we started -- we accelerated in Q4 of last year. This is one reason.

And despite accelerated pricing, we saw a continued stable demand in the first 9 months in that context. So however, the overall macro environment remains highly uncertain, with really challenges ahead, increasing inflationary environment, risk of gas shortages, increasing geopolitical tensions, continued tight supply. So with other words, what we want to say is maybe we are -- when we made the outlook, we are more in a conservative or reflecting this volatility.

And by that, with regard to Q4 and in line with recent downward revisions of macroeconomic forecasts, we expect the industrial growth to further slow down. On the other side, the recent levels of IPX have been revised downwards by 20 bps to a level of around 3% for 2022. And we are seeing, on the one side, first signs in some categories like construction furniture. But on the other side, we are seeing also still strong demand and growth components in other segments.

So therefore, I think I could say it's on that part, a conservative or still reflecting the volatile situation. And a little bit the same is also related to consumer businesses. What is -- and you know that we normally don't give any tradings into Q4. But we just finished the October results. And in regard to October, we see a continuation of the very positive trend and the promising development by that for the remainder of the year for all 3 businesses. That means for Adhesives, for Laundry, and for Beauty. But the time is really volatile in these points, but October is really a confirmation and the positive sign of that what we have seen in quarter 3 is also continuing. And in that context, for sure, the outlook then for quarter 4 looks a little bit conservative. Marco, for the second one?

[Marco Swoboda, executive]

Yes. For your second part of the question, cost inflation and the cost base. So for 2022, as you said, and we see that still in line with our previous assumptions, and that means close to EUR 2 billion of gross input price headwind, and that means roughly mid-20s percentage.

And we don't yet -- cannot comment on next year in detail. I can comment on what we currently see. But of course, we will conclude on what that means when we move forward and when we give also our guidance for the next year. But what I think has to be looked at is, for sure, when we see the price evolution this year, the second half is clearly above the first half of this year. So we run against a lower comparable in the first half. When we go into next year, that will be, for sure, one element that has to be considered. Then second, we see uncertainty now in particular in Europe, resulting from the gas price, and that has impact on particular -- some of the petrochemical feedstocks.

On the other hand, there are also downwards trends that have been observed now over the last 2 months in certain feedstocks. We see that crude oil has continued slight decline, although you see that is pretty volatile when you look at the last few days.

We see that edible oils has significantly gone down in the past months and were further declining just recently, and that is input in our laundry care business, for example, not directly, but derivatives of edible oil, and we're also seeing significant price corrections in the petrochemical area in specific fields and that more regionally located in the U.S. and Asia, where we see declines even double digit. But as you see, there are a couple of trends that also compensate each other. And so far, we will not give a guidance for next year. We see pluses and minuses.

[Celine Pannuti, analyst]

I just want to come back to my first question on Q4, where I want to specifically to hear from you on volumes. Some of the headwinds that you mentioned like the portfolio measure and the negotiation with the retailers. Is this going to be as impactful in the fourth quarter as in Q3, please?

[Carsten Knobel, executive]

Yes. Celine, I think the continuum of the portfolio measures, I think, are continuing in Q4 because what we see is that we are making continuously progress on that. That's one thing. And the topic of the price increases, we also said that it will continue in Q4. And by that, we are also in negotiations with our trade partners. So there is no -- from my point of view, no drastic change on that. And I think in that context, Celine, I think we have today raised our guidance. And I think that is also a clear sign that we are confident going forward. Hope this helps.

[Operator]

We now move on to our next questioner, which is Jeremy Fialko of HSBC.

[Jeremy Fialko, analyst]

A couple of questions from me. First one is if you could talk about the Professional Hair Care business. Certainly, one of your peers has spoken about some signs of weakness in that market, where people spacing out there, visits to the salons, a little bit more. Maybe you could talk about that side of the Beauty business and what your expectations are in the coming quarters?

And then the second question is on like customers, inventory levels and destocking. So perhaps this is more related to the kind of industrial side. Whether you think that the customer inventories are at a healthy level, whether you think there's any risk of kind of a destocking towards the year-end. Perhaps just to comment on that side of things and what that could do to volumes in the coming quarters as well.

[Carsten Knobel, executive]

So maybe starting with your first question related to our Professional business and Beauty. So first of all, the Professional business continued its strong growth trajectory also in Q3, and we have recorded good organic sales growth after having recorded double-digit growth in Q1 and a significant growth also in Q2.

And from a regional point of view, the growth was driven by the emerging markets with all regions here showing double-digits development. Sales were, I think, a little bit below prior year in the mature markets, mainly due to the negative development in the U.S. or in North America. And here, the overall inflationary environment might have an impact on consumer behavior. And I think that brings a little bit also the context of the overall situation.

Yes, we are also seeing some impacts in a way that consumers are changing slightly their behavior in terms of not going in the same cyclical way to the hair dressers. But I think that is I think, a clear situation, which we have seen quite often. And we also have seen that quite often that situation changed going forward quite fast. And I think the thing -- also here looking into the single month of October, we see a quite okay development. For sure, not the high growth rates at this point, but overall, the professional situation also with our acquisition part in Asia, I think is on the right way also looking into the next quarters.

When we talk about the other part in terms of customers destocking in that context, I think we are in a very dynamic environment where we currently have continuously increasing the material costs on the one side as well as pricing. And by that, for sure, customers continuously review their stocking levels. And in light of the weakening demand, however, we don't see any prebuying or any other tendency of a destocking in this -- at this moment. I hope this helps, Jeremy.

[Operator]

Up next, we have Chris Pitcher of Redburn.

[Chris Pitcher, analyst]

A couple of questions from me. Carsten, Marco, I mean going back to the global financial crisis, how would you say your internal reporting systems have improved in terms of seeing the downturn quicker than last time across the 3 different subcategories?

And then secondly, on Beauty. In terms of what's happened for the margin to come in ahead of your previous expectations. Is it sort of a balance of pricing mix? Have you've been able to accelerate cost savings because of the integration being ahead of plan? Or given the fact that it's a low margin -- lower margin category, is there a disproportional benefit from the continued Russian contribution and therefore, potentially a deferred headwind into next year?

[Carsten Knobel, executive]

Yes. So maybe I start with the margin topic. And Marco, maybe you take the first one related to the crisis and implied or impacted reporting system or in that context. So if we look into the situation, of the margin situation in Beauty Care, I mentioned it on GP1 but also for sure in the consequence of the adjusted EBIT margin in that context. I think we have been raising the adjusted EBIT margin driven by several factors.

One is the strong year-to-date performance, which is driven, for sure, also by pricing. Second, a positive mix effect with a stronger -- or a strong Professional business in that context. Then we have seen first positive effects from the optimized portfolio mix by taking dilutive brands, dilutive businesses, respectively, out part of the portfolio discontinuation. For sure, we also continue in that context, a strong cost discipline and also realizing efficiencies, and all of that has helped. And yes, when we talk about that we are ahead of plan in the merger also here, we have first impacts, which are more than what we expected originally when we made up the margin guidance at the mid of the year or in April of this year.

[Chris Pitcher, analyst]

And specifically on the Russia contribution to Beauty, given was Russia a higher-margin market for Beauty than globally and therefore, by keeping it in longer, that's a temporary benefit? Or is that not something to be mindful of?

[Carsten Knobel, executive]

Yes. Chris, I think you know that we are in all businesses in Adhesives, in Laundry and in Beauty with strong positions in Russia. And yes, the current situation, and I think Marco talked about that at the beginning when we had the first question about Russia. That is also impacting the performance while we're speaking since we have this business still in our businesses. Hope this helps.

[Chris Pitcher, analyst]

Yes, and on the feasibility.

[Carsten Knobel, executive]

Yes. Yes. Yes. Marco will go now to that. I only wanted to check if you are fine with the second answer. So Marco goes for the first question.

[Marco Swoboda, executive]

Yes. So Chris, you refer back to the global financial crisis 2008 and 2009. And when we look back, of course, I mean, what we clearly observed in particular in the Adhesive Technologies business, we saw also that there was a stronger decline in a heavily contracting market back then, and that was happening in 2009.

But we also saw that, that business was able to recover very strongly and quickly after the dip that we had seen. Affected businesses in the area of automotive, for example, that was particular strong declining at that time, but we have worked in the meantime, a lot on also making that portfolio more resilient. And so we also improved the share of the businesses that are not so cyclical in the Adhesive Technologies portfolio. So we think that the portfolio today is less cyclical and generally more robust.

And then you also asked whether reporting systems would have been different or refined in the meantime. So I mean, when we look at how we do it, maybe that is how I would like to answer that, how we also derive our forecast. And we review a lot of external macroeconomic indicators also how the industrial production will evolve. So we use, for example, the IPX index that we also reported on from time to time here.

So we look at all sorts of external sources to really also include these forecasts into our modeling. So in that sense, also how we derive and model the forecast that has changed quite a bit over that time span. But of course, it all depends on what are the predictions also then the externals do on how they see the overall economy to move, and that's what we typically build into our forecast.

So that's what I can say basically to that area. Of course, we take into account all sorts of information to come up with the best estimate that we can have and then also basically inform on that on a regular basis. That's why also today, we will see that we also have, of course, moved our outlook also compared to what we have seen before. And that also reflects a bit what we see in the environment.

[Operator]

And our last question for today comes from David, Hayes of Societe Generale.

[David Hayes, analyst]

If I can just quickly follow up on the conservative fourth quarter outlook and a quick question on the integration. So just on the fourth quarter outlook, just a couple of follow-ups. A, do you think we've seen the peak level of delistings or is that still building? And I guess related to that, is that just the Western European regional thing? Or are you actually seeing that in other regions as well? Is it beyond that? And I guess it should be slightly cheeky just to add another one in.

You say in the guidance that you're assuming no production issues in Germany, but is there actually a little bit of an implicit cover for that happening in the fourth quarter? And have you got any better visibility on the risk of that happening at all over the next few months?

And then the second question, which is on the consumer integration. Is there any other negative effects that you're seeing currently through the integration, obviously, going quicker than perhaps you planned? And I guess what I'm thinking about, going back to the extreme trade negotiations that are going on, but you're changing personnel, I guess, in some cases, because you're taking out the duplication. Is that making it more complicated? Are you kind of going through an integration through a period of time where actually it's not ideal because it's actually quite challenges, a lot of challenges to deal with.

[Carsten Knobel, executive]

Yes. Good morning, David. So maybe starting with your last one, the consumer integration. I think if somebody would talk that an integration is easy, I think definitely that would not be the truth. So I think it's a very challenging exercise, and I think you have tackled some major topics.

I think to get the organization right, there is a lot of unsecurity with -- in terms of people, are they onboard or off-board or who takes what kind of position. And I think that's where I'm really proud on what was going at the team in -- also in cooperation with Sylvia and HR are doing currently, really that we have moved the organization into an execution mode that we are already live in most of the regions. As I said, Europe in that context is a little bit more special. But also here, we are moving quite fast on that and our life.

So yes, and for sure, negotiations with trade are always related to people. And the faster you have your organization ride, the better you are also prepared in that context. And David, I can only relate to that what I said before, if you look into the results that we have also increased the outlook for our Consumer businesses for both in that context, I think it's very clear that despite the merger and despite all the challenges we see in the environment, I think we are moving well on that.

And I think that is definitely the right direction and makes us confident that we also continue to do that, be it in the fourth quarter or also be it in next year. When it comes to the question again on the quarter 4 based on the outlook. Is there a delisting peak in Europe? Negotiations are ongoing, but there are no major customer clashes so far. I think that's also related to what I said. The impact overall is not a significant one, also in the effect, what is volume, what is elasticity and so on.

And we will continue with pricing measures in a responsible way to compensate for the input cost increases and the energy prices. And to your point of production issues in quarter 4, we don't see any on that currently. And the point is here, and I mentioned it, that the outlook in specific way is a kind of conservative but also reflecting the volatility and the uncertainty we see.

We all know that things can change quite fast within a short period of time. That was also the point that in that context, exceptionally, I made a comment to the October results where we were clearly, yes, continuing the past what we have seen also in the frame of Q3.

So what -- on the other side, what is excluded in the guidance is also clear. Major hiccups to potential gas shortages or escalation of the war. For sure, they are not included in that context. But I hope that gives you the frame. Anything to add, Marco?

[Marco Swoboda, executive]

Yes, I think as I said before, so far, that is not our base case that there will be now shortages in the fourth quarter. So far, that looks well managed by all the governments and regulators. And when we see the filling levels of the gas storage, for example, in Germany that is at a very, very high level, close to 100%. So that looks much better than it maybe was 3 months ago.

[Carsten Knobel, executive]

David, I hope that clarifies.

[Operator]

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

[Carsten Knobel, executive]

So thank you so much for your questions, and let me briefly summarize today's presentation. I think we have delivered a strong performance in the third quarter, reached an all-time high in the quarterly nominal sales. We achieved a double-digit organic sales growth of 11.3%, driven by accelerated pricing across businesses and the regions. And this clearly shows we are navigating successfully in an environment which remains to be highly challenging. Input cost headwinds persist, energy pricing -- prices are rising and there is a continued high level of volatility and uncertainty.

And while managing our business in that environment on driving the strategic priorities outlined in our purposeful growth agenda, with tangible progress, be it in the execution of the Consumer Brands merger, be it the launch of relevant innovations or advancing our portfolio, and there is a clear proof. And I'm convinced, yes, there are challenges, but we are also on the right track.

And lastly, we updated our outlook for the full year-to-date and raised expectations for both sales and earnings. And before closing the call today, let us take a look at our upcoming events. I look forward to connecting together with Marco in our call in March when we will present our full year results. And with this, I would like to thank you for joining this call. And as always, take care, stay safe and also stay healthy. Bye-bye.

[Operator]

Thank you. That will conclude today's call. Ladies and gentlemen, you may now disconnect.