Growth Outlook

Henkel's Target in Doubt

Henkel CEO Kasper Rorsted source Rudolf Wichert for Handelsblatt
Adidas CEO Kasper Rorsted, Picture Source: Handelsblatt
  • Why it matters

    Why it matters

    German cosmetics and adhesives maker Henkel seems unlikely to reach its 2016 revenue target, putting pressure on incoming chief executive Hans Van Bylen to present a new strategy to spur growth.

  • Facts


    • Kasper Rorsted reached his business goals in the first half of his stint as Henkel’s boss, but is unlikely to deliver on all of his 2016 targets.
    • Mr. Rorsted became Henkel’s chief executive in 2008 but will resign at the end of April and move to Adidas in August.
    • The new Henkel chief executive, Hans Van Bylen, is expected to present the Düsseldorf-based firm’s new targest by the end of this year.
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It was a catchy turn of phrase that Kasper Rorsted, head of Henkel, used to outline his 2016 goals. Speaking in an upmarket London hotel, he explained his vision in a nutshell: 20 – 10 – 10. With this he signaled expectations of €20 billion in sales, of which €10 billion would come from growth markets, creating an average annual earnings-per-share increase of 10 percent.

But now those numbers ring hollow: the maker of Schwarzkopf shampoo, Persil laundry detergent and Loctite adhesives looks unlikely to score all of those goals outlined in late 2012, largely because of weaker-than-expected growth in key emerging economies such as China, Brazil and Russia.

In January, Mr. Rorsted announced that he would move to the German sportsgear firm Adidas after having led Henkel since 2008. Shortly after Monday’s annual general meeting he will bade farewell to Henkel at the end of April and join Adidas in August. He will become the sports shoe maker’s chief executive on October 1.

At Henkel, Mr. Rorsted has been credited with increasing profitability and had twice set medium-term goals for the company: By 2012 he aimed to reduce debt, after a big takeover of an adhesives firm, and to reach a competitive operating margin. Back then, the Danish-born executive delivered on his goals.

“On the current outlook, it’s going to be a stretch to get to the €20 billion.”

Kasper Rorsted, Henkel's CEO on Bloomberg TV

For the following years until 2016, he outlined growth targets, which analysts said were largely unambitious.

But the trading landscape has shifted. The downturn in the countries which were expected to serve as the motor behind fast growth affected the whole consumer-goods sector, including main rivals Unilever, Procter & Gamble and L’Oréal. Mr. Rorsted’s weak excuse of blaming deteriorating exchange rates disappointed many in February, when the company presented a 2015 organic revenue growth of 3 percent and a lower growth outlook than normal for the current year.

For a long time he had managed to stick to his 2012 goals, despite the hefty economic crisis. In contrast, the current slowdown underway in China, Russia and Brazil looks almost harmless. Since 2013, the currency effects have dented nominal sales growth by only 4 percentage points.

In 2015, Henkel’s sales stood at nearly €18.1 billion, or $20.6 billion, of which almost €7.8 billion came from the emerging countries. The adjusted earnings per share rose by around 9.7 percent on average over the past three years.

That puts the earnings goal, which is important for its dividend, within reach. But to accomplish the targeted €20 billion revenue growth for 2016, Henkel would need stronger growth in 2016 than last year. Helped by currency effects, the company managed 10 percent in 2015. Even Mr. Rorsted views beating that as unlikely.


Henkel in Numbers-01


“On the current outlook, it’s going to be a stretch to get to the €20 billion,” Rorsted said in an interview with Bloomberg TV in February.

It is not just the foreign exchange markets and the weak overall trading environment that look set to impede Mr. Rorsted from scoring his revenue goals.

The public image projected by Henkel’s manager is clearly too euphoric for many. Recently he enthused about a “scalable business model,” a buzz term imported from Silicon Valley which means that coupling growing sales with costs which hardly climb.

That concept would usually apply to business like smart-phone apps, where costs are occurred during programing, but not while the app is used.

But traditional producers work differently. They need more materials to increase their output, even if the two figures don’t rise in exact tandem. That is a fact that Mr. Rorsted cannot alter. Indeed Henkel’s 2015 operating costs climbed by just 2.5 percentage points fewer than its revenue. But notably, in the same time its administrative expenses rose by 18.8 percent to more than €1 billion, even though Henkel has transferred a number of jobs from its headquarters in Düsseldorf to countries with cheaper labor.

Similarly the costs for research and development climbed unproportionally to 15.7 percent, while the marketing and distribution expenses climbed by 11 percent, more or less in keeping with revenues growth.


Hans Van Bylen, a long-time Henkel manager, will take over as CEO. Source: DPA / Federico Gambarini


Behind Henkel’s growth strategy is the hope that rising profit will be generated by climbing sales, especially in booming markets like Asia, South America and Africa, as well as Eastern Europe. Acquisitions were meant to form an additional motor for growth. However, in recent years, Henkel only made small purchases. The largest, made in 2015, was the purchase of Colgate washing detergents in Australia and New Zealand for €194 million.

In total, Henkel paid €374 million for takeovers, but its big shopping spree never happened. And emerging economies are shaped by the trend of local firms providing stiff competition for global companies, meaning it is to Henkel’s disadvantage that it failed to snap up smaller competitors.

And even its attempted takeover of Procter & Gamble hair products firm Wella, which was thwarted by a higher bid from the U.S. competitor Coty last year, would have changed little in developing countries. Wella, like Henkel, is generally strong in saturated markets.

Henkel’s earnings continue to grow more or less at the same pace as its key competitors, including Unilever (10 percent nominal growth, 4.1 percent organic growth), L‘Oréal (12.1 percent nominal growth, 3.9 percent organic growth) and Beiersdorf (6.4 percent nominal growth, 3.0 percent organic growth). That places Henkel firmly within the sector trend.

But Mr. Rorsted has given the impression that Henkel, as a relatively small player, could be more dynamic than its competitors. But instead, it seems that the improvements which helped the Henkel boss shine between 2009 and 2012 have run their course. The return on capital employed, or ROCE, even slightly declined between 2014 and 2015, currently standing at 18.2 percent.


CEO Rorsted and Henkel's Shares-01


The long-term debts, in particularly a €1.3 billion hybrid loan, are completely paid off. In the short-term, Henkel accessed short-term credit via money market instruments, some €800 million by the end of 2015. It is striking that the company continues to be constantly reconstructing itself, producing some €193 million in restructuring costs, only slightly less than that of a year earlier.

All in all, Henkel does look more stable at the end of Mr. Rorsted’s leadership than at the beginning. Debt has been slashed; even the adhesives business with industrial clients is proving stable, despite the Chinese downturn. Henkel is in a good position to absorb a bigger acquisition. Meanwhile, shareholders are befitting from a dividend payout ratio of more than 30 percent.

But the fact remains that Mr. Rorsted had fueled higher expectations. For that reason, his exit is tinged with disillusionment: The manager has shown that he can reform Henkel but he couldn’t shape a new vision for the DAX-listed company. It is now down to his successor, Hans Van Bylen, to define the next strategic phase.

In contrast to Mr. Rorsted, though, Mr. Van Bylen is an in-house successor. The former head of its beauty care business will likely stick to his predecessor’s financial-market-orientated strategy, but chances are he won’t make so many grand promises.


Christoph Kapalschinski covers consumer goods, textiles and food for Handelsblatt. Christoph Schlautmann, who covers the logistics and waste management sectors for Handelsblatt, contributed to this article. To contact the author:

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