Henkel AG & Co. KGaA (HEN3) Earnings Call Transcript & Summary

Good morning, and welcome to the Henkel Conference Call. With us today are Carsten Knobel, CEO; Marco Swoboda, CFO; and the Investor Relations team. [Operator Instructions] Please note there will be a live webcast of today's conference call, including your 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 the salutation to be published on our website. Here, we will briefly mention your name and the company you are representing. At this time, I'd like to turn the call over to Mr. Knobel. Please go ahead, sir.

Dear investors and analysts, Good morning from Dusseldorf and welcome to our conference call following our announcement this morning. Thank you for joining and for making yourself available also on short notice. Together with our CFO Marco Swoboda, I would like to take you through the major topics and of course also to answer your questions. Before we start, I would like to remind everyone that this presentation, which contains the usual form of 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 the discussion are conducted 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. So what are the key topics of today's call? After a brief run-through of our top line performance in the first quarter based on the preliminary figures, we will take a closer look at our current business environment, which is truly unprecedented. We have been facing fundamental changes since the beginning of the year with the war of Russia against Ukraine and additional drastic price increases for raw materials and logistics. This has implications on our expectations for the fiscal year 2022. That is why we have updated our guidance this morning. Here, of course, we want to explain in more detail the respective drivers and the key assumptions which are behind. But let us first take a look at our sales performance in Q1. Today, we will focus on the key sales performance indicators based on preliminary figures. As planned, we will comment in more detail on May 5, where we will publish our full Q1 results. In a highly volatile and challenging market environment, Henkel achieved a significant organic sales growth of 7.1% in the first 3 months of 2022. In nominal terms, sales increased to a level of EUR 5.3 billion. Growth was driven by strong pricing across all business units. Looking at the business unit performance. Adhesive Technologies achieved double-digit organic sales growth of 10.7%. Here, growth was driven by all 4 business areas. Beauty Care was slightly below the prior year level, mainly driven by the implementation of the announced portfolio measures in our consumer business, which had a negative impact on sales. The professional business in contrast continued its growth path, posting a double-digit increase. And in Laundry & Home Care, we achieved a very strong organic sales growth of 4.9%. While Laundry Care recorded significant growth, Home Care was slightly negative mainly due to the normalization of demand for the hard surface cleaner segment. Moving now on to the outlook, and let me be clear. Our environment has changed dramatically since we provided our initial outlook for 2022 at the end of January. Already 1 month later, the world was shocked by the Russian aggression against Ukraine. Since then, our primary concern has been the safety of our colleagues in Ukraine and their families. We have been doing everything we can do to support our employees in this dramatic situation. And we are in constant exchange with our crisis teams helped immediately and also supported with the nations. It was also clear that the war has far-reaching implications, not only on our company, but also on global economy. Not least, it intensifies the already difficult situation on the raw materials and logistics market, resulting in an even more drastic headwinds than already anticipated. Considering these developments, we updated our outlook today. Before providing more color on the specific underlying key factors and assumptions, let me guide you through our updated guidance for this year. It reflects the substantial rise of input costs and the implications from the war in Ukraine, including the exit of our business activities in Russia and in Belarus. We now expect organic sales growth on group level in the range of 3.5% to 5.5% due to a high expectation for Adhesive Technologies. Here, we now anticipate organic sales growth of 8% to 10% compared to the 5% to 7% previously, driven by stronger pricing. For Beauty Care and Laundry and Home Care, our guidance for organic sales growth remains unchanged. While we expect higher pricing, we anticipate lower volumes compared to our initial outlook. And as before, the organic sales growth guidance for Beauty Care considers the announced portfolio measures in consumer, which are already in implementation. And as I just said, our earnings performance in 2022 is expected to be affected by substantial headwinds from cost pressures from raw materials and from logistics to an even larger extent than initially anticipated. And more on that in a minute. On group level, we now expect the adjusted EBIT margin to come in between 9% and 11%, and this compares to our previous expectation of 11.5% to 13.5%. By business unit, for Adhesive Technologies, we expect an adjusted EBIT margin in the range of 13% to 15%. For Beauty Care, between 5% and 7%. And for Laundry and Home Care in the range of 7% to 9%. This also then translates into an updated guidance for adjusted EPS, where we now expect the development in the range of minus 35% to minus 15% at constant exchange rates. Now for the details of the outlook, I will hand over to Marco. Please, Marco.

Yes. Thank you very much, Carsten, and Good morning to everyone in the call also from my side. Let us now take a more detailed look at the specific underlying assumptions, starting with the implications from the war in Ukraine. As you know, Henkel has a strong footprint in Russia. We have been active there for 30 years, operating 11 production sites and employing 2,500 people. 2021, the country accounted for less than 5% of total group sales. Against the background of the current developments, we decided to exit our business activities in Russia. We announced the step on April 19. This decision was not an easy one. We had to carefully weigh different aspects, including the further development of the situation and the sanctions, our responsibility for employees in Russia, but also our company's reputation. And today, we also announced to exit our business in Belarus. Not surprisingly, the exit from these countries will significantly impact our sales and profitability. And from a KPI standpoint, both Russia and Belarus will be excluded from our organic sales growth from the second quarter onwards as a result of the decision to discontinue these businesses. Moving onto the situation in Ukraine. As said, our focus is on the safety of our colleagues in the Ukraine. Here, we employ 600 people and our business accounts for less than 1% of group sales. Of course, our business in Ukraine is affected by the dramatic situation in the country. Looking at the financial impact, we expect a noticeable effect also on group sales and profitability. And of course, with its geopolitical implications, the war has also significantly accelerated the already difficult and highly volatile situation at the raw material and supply chain markets. Overall, we have seen a further sharp rise in input costs, much more significant than already anticipated. End of January, we expected direct material prices to increase by a low double-digit percentage compared to the prior year average, corresponding to an absolute headwind of close to EUR 1 billion. The situation has become even more difficult. From today's point of view, at the midpoint of the adjusted EBIT margin range, we expect an average increase in the mid-20%s range, doubling the absolute amount to now close to EUR 2 billion, a magnitude we have never seen before. The high degree of uncertainty and volatility around the further development is reflected in our earnings guidance ranges. And this development that I referred to before on the purchase market is broad-based. We have seen a drastic change compared to our initial assumptions regarding the price increases for key feedstocks such as crude oil, palm kernel oil or polyethylene. When it comes to the impact by business unit, we have to distinguish. Overall, Laundry and Home Care and Adhesive Technologies will face the strongest tailwinds. And Beauty Care will be affected to a lesser extent. In addition to the pressure from direct materials, we see additional headwinds of around EUR 200 million for outbound logistic services. Of course, our teams work hard to compensate for these severe effects. We have stepped up our countermeasures, including additional pricing and savings initiatives. And here, for sure, the level of compensation is always depending on the feasibility and respective timing. We will get back to that in a minute. When looking at the implications on our margin, we also have to take into account that passing through higher prices will result in higher sales, quite obviously, while all other things being equal, the absolute EBIT remains stable. As a consequence, the margin will be diluted. And here, we assume that, that will be an effect on Henkel's group margins by roughly 1% year-over-year in 2022. Back in January, we were among the first ones to comment early on about the sharp headwinds we expect to face this year from input cost pressures and strained supply markets. And we also do so today, given our assessment that the situation significantly worsened, not least due to the war in the Ukraine and all its implications. So very clear, we are operating in highly challenging times with unprecedented price increases and a degree of volatility not seen before. And as I said, headwinds doubled versus last year. And the extraordinary magnitude becomes particularly clear when comparing it to the years before. Over the 10 years from 2011 through to 2020, we had experienced direct material headwinds of around EUR 100 million on a yearly average over that 10-year cycle. So the cost pressure we expect this year alone clearly exceeds the sum of the annual price increases over the last decade. And with that, back to you, Carsten.

Thank you, Marco. Of course, facing these dramatic developments, we are stepping up our countermeasures. We are implementing additional pricing initiatives across all 3 businesses with certain differences. In our Adhesive Technology business, we are well positioned to pass on higher input costs to our customers, as also said in earlier conference calls, always with a certain time lag of around 3 to 6 months. And here, we clearly expect stronger pricing this year as reflected in the raised outlook for the organic sales growth. In our Consumer businesses in Beauty Care and in Laundry & Home Care, it will take longer to pass on higher costs, and from a regional perspective, in the mature market, it requires even more time than in the emerging markets. And of course, next to stepping up pricing, we will further implement saving initiatives in our supply chain. This includes, for example, efficiency gains or intense negotiations with suppliers. And with this set of measures, we will limit the impact on our profitability. For sure, there is a certain time lag, as I mentioned before, until cost pressures will be fully compensated. And you can see that also historically, when looking at our compensation of the material price hikes following the financial crisis. Of course, the magnitude was different, but the effect is the same. Over time, we are convinced that our profitability will recover. So even though we achieved a significant organic sales growth in the first quarter, we know for sure, this year will not be an easy one. In fact, we will face an even stronger headwind than already anticipated. All the same, we have a strong foundation and follow a clear agenda to create purposeful growth for Henkel. We have a strong balance sheet with low debt levels, and we have a strong business. With Adhesive Technologies, we are globally leading, and we offer innovative solutions for many key industries with a clear focus on future mega trends such as mobility, sustainability and connectivity. And with the merger of our consumer businesses, Laundry & Home Care and Beauty Care, we are creating a multi-category platform with around EUR 10 billion of sales, Henkel Consumer Brands. Our future Consumer Brands business will be up and running latest by beginning of 2023, and it will offer a broader platform to consistently optimize and shape our portfolio and to bring it to a higher growth and a higher margin level. So to wrap it up, yes, we do see a more than challenging environment with exceptional headwinds from input costs and broad implications from the war in the Ukraine. And our updated outlook shows this will significantly impact our business performance within this year. But we are also confident to pass these extraordinary headwinds through over time and recover our profitability. So going forward, we remain firmly committed to delivering on our mid to long-term financial ambition. And with this, let us move now to the Q&A. Ladies and gentlemen, we are looking forward now to taking your questions. Thank you.

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

I've got 2 questions. The first one is on your HPC consumer goods operation. Both divisions achieved a strong start to the year, so it's above the top end of the respective organic sales growth guidance range. And I would assume with more inflation, you will also get more pricing actions than initially anticipated for both divisions. So my question is, why have you not changed this morning your 2022 organic sales growth expectations for Beauty and for Laundry. Any particular areas of concerns you may have? I mean I seems now it's down to price elasticity, maybe down trading that you could be worried about. And I guess, related to that, how would you reconcile some significant volume growth decline, I think in Q1 already, Laundry & Home Care was down 5% at the time when you're trying to reignite some market share momentum. So that's my first question. My second question, hopefully, it's much shorter. It's on China. Does your revised outlook taking some severe disruptions in China associated with the continued strict lockdowns we are seeing? Or at this stage, do you assume some normalization as we get into the second half of the year? Basically, just trying to assess whether there could be some additional downside risk to your EPS guidance for this year if trading conditions were to worsen in China?

So I take the first one -- I'll start with the first one regarding to the Henkel consumer businesses. You're absolutely right. We have a good start into the quarter. If you look at quarter 1, both businesses came out better than the market expectations. And I think what you also could see is that we also have or could implement quite strong pricing part in the Beauty Care part, roughly 5%. And in Laundry & Home Care 10%. You may ask the difference between the 5% and 10%. But what we see is definitely that in the Laundry & Home Care business and in Adhesives, the material price headwind is significantly higher than in the Beauty Care. So therefore, this is also reflected in the pricing that the Q1 also foresees that we have seen that higher in these 2 businesses. If we -- and you're also right that we have not increased the guidance for the Laundry & Home Care and the Beauty Care business for the full year. And as I said, we witnessed strong price increases, while partly volumes declined. And the pricing elasticity varies really by market and by brand, especially in Western Europe. And we have seen here, and that is not directly to the elasticity of the consumers, but we have seen a quite strong opposition from trade toward higher prices, also quite outspoken by some of the retailers and traders in the press. So there overall -- although the current inflation rates indicate the widespread of the price increases across all consumer markets, we expect that certain negative effects also here on volume. And therefore, we see -- with the stronger price increases, we are at that point, taking that into consideration. And by that have not increased the outlook for the OSG part for these 2 businesses. And you know in Beauty Care, I mentioned that, and we mentioned it before that the volumes are also affected by the portfolio measures, the EUR 200 million we announced at the end of January, which will impact the volume within the year of 2022, but not different than what we have initially commented on that. Maybe that helps on the first question. And to the second one. On China, Marco, you will take that.

Yes, I can do that. And of course, we are aware of the situation of the lockdown in China, in particular in Shanghai. As probably aware, we run quite a number of plants in China and also in the Shanghai region, in particular, for our Adhesive Technologies business. So there were temporary restrictions that also affected our production sites, and we are managing through that now. We have established a closed-loop management approach. That means some of our employees also are remaining on site to keep operations up and running, at least to a considerable degree in order to supply our customers wherever possible for sure. There are also challenges around logistics in these times, but the teams are fighting through that. In Q1, we were affected by a low double-digit million euro figure on the top line. And we see some further impact also in April. However, we assume so far that will be overcome also in the course of the second quarter, and we do not foresee in the guidance severe restrictions also in the second half. And for sure, as you say, that is, of course, a risk, but it's at the moment, hard to predict. So that's how we look at it for the time being.

Your next question comes from the line of Bruno Monteyne from Bernstein.

The first is about understanding a bit more the 250 basis points margin -- lower margin guidance. I'm trying to first sort of figure out how much of that is due to Russia and Belarus closure? I mean, it's clear that they made the same margin as the group margin you're saying. So I presume it has limited impact above and beyond maybe overheads. So if most of the 250 basis points is basically the existing core business due to higher commodities, how come that is such a bigger reduction in profitability in almost all other companies that have had quarter 1 results? Everybody is lowering or softening guidance by a bit, we are sort of talking about the order of 20 to 50 basis points. This is a lot bigger. So what explains that much bigger sensitivity to the changes in commodity since the start of the year? The second one is, I presume, given the risk of gas supplies to Germany, Italy. In Europe, you've probably done some scenarios. What would happen if suddenly they cut off gas, I guess most people's expectation is for a recession in Germany and Italy on the back of that? How are you factoring in, in your guidance for adhesive, like the probability of a gas cut and the recession in those 2 countries? And if not, how big would the impact be you think of such a move to your business in adhesives?

So I'm starting with your first question. So maybe let me put that in perspective and starting your question with the first look at the EPS growth guidance. If you compare the EPS growth guidance, we now -- the updated one compared to the original one. We have shifted that by roughly 20 points to the left. And that out of that, 1/3 of that is attributable to the exit of Russia and Belarus and 2/3 of that are attributable to the drastic input cost pressures. Maybe that's the starting point. Your question was specific then on the margin, the 250 basis points, 50 out of these 250 basis points, Marco explained in terms of this mathematical effect. And if needed, Marco can comment on that. So the remaining 200 basis points are related to the increase of the material costs because -- and I think you said it in your statement, the margin profile of the businesses we will exit. That means Russia and Belarus are on more or less equal on the level of the Henkel Group in total. So therefore, that is not a big effect. And when you say you have -- when you compare that with other companies or with inputs from other companies, I can at this point, for sure, or we can only speak for our business. In fact, that the burden is resulting from the current environment has intensified dramatically since the beginning of the year. In the outlook we had at the beginning of the year, we assumed EUR 1 billion of material price increases. And this has been now updated to roughly EUR 2 billion. So the EUR 1 billion increase is related then to an impact of 200 basis points in the margin change. That means roughly EUR 400 million. And if you compare to the EUR 400 million to the additional EUR 1 billion of material price increases, that's roughly that we compensate roughly 60% in this year. And as we said, that the pricing increases will not only be compensated within this year, but also spillover to the year 2023, where we will compensate for the rest. I think that's the logic or the explanation behind. And the other part, the gas supply, Marco, you want to -- you will take it?

For sure. It's a very valid question, and that is a risk, of course, that looms around us, in particular in Europe. So the guidance does not assume that the gas supply from Russia will be cut. I mean that is not the assumption. And also the impact is not -- it is not possible to precisely predict that. But of course, as you also can read from all different analysts that probably will trigger a recession in Europe. And I mean, if you look at Henkel, overall, we are not an energy -- or a high energy consumer in that sense. So our total energy spend is probably less than 2% of our COGS base. So from that point of view, energy doesn't play such a big role in our production. But of course, we are depending also on supplies of certain base chemicals, just, for example, and there we will see a quite intensive impact. And if gas is really cut for Germany, for example, there would be a clear order of preference at first private consumption would be favored. And then, industry will be cut off to quite a high degree. And our suppliers will then also be -- not be able to produce. So on the supply side, that will have a strong impact on us. That is very clear. I mean we are working on, of course, contingency plans also using alternative energy sources. We started also to decide that we also will continue, for example, energy production out of coal yet our main site in Dusseldorf for a longer time than originally assumed. That all will be done. But of course, we will see an impact from our supplier side. And at that moment, it's impossible to predict how intense that will be. We have various scenarios that is very speculative. So we are preparing as good as we can. But of course, that scenario would have a huge impact on the overall economy in Germany and in Europe as a whole.

The next question comes from the line of Olivier Nicolai from Goldman Sachs.

Just one question actually. End of January, you've provided a midterm guidance of 16% EBIT margin in the mid to long-term. What's the timing of the path to get there? And should we also expect a step-up in CapEx, whether it's this year or in the outer years, actually more likely to make your business more profitable?

So yes, you're right. The midterm guidance -- midterm financial guidance, we updated in January. And as you have heard today, we confirm that. We have not given a specific year or timing on that. And we are committed to deliver on that. We see what is happening as a temporary major topic as a temporary situation, which we will overcome as we explained it in Adhesives faster than in the consumer businesses when it comes to the situation of the material price increases and the logistic price increases. And when it comes to the Russian and Ukraine -- to the Russian and Belarus exit, it's clear. The business will not be part of our portfolio. But I said it before, it is not insignificantly the margin situation, for sure, the EPS situation because business has been done. For sure, of Ukraine, we hope that this business will come back after and we have also a good business on that, that it will come back when the war is over. So therefore, we are committed to this. And as I explained, I think with Adhesives, we are well positioned to cover also trends like mobility, sustainability and connectivity. And the upcoming merger between Laundry and Beauty, we really are convinced that by creating the platform and we will also give you -- as initiated next week on Thursday, also a detailed update on what we are -- what we foresee, be it from a strategic or business perspective, but also from a synergy perspective, what we expect with these businesses going forward. So therefore, committed and no change to the mid and long-term financial ambition.

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

Just a couple of questions for me, if I may. Firstly, when you talk about offsetting the rest of the raw material headwinds in 2023, does that mean that we should be expecting 100 or 200 basis points margin expansion in 2023 as your unrecovered raw material costs kind of come through? And then I suppose my second one is just to help us understand why your sort of margin impact seems to be slightly higher than peers. I can understand that consumer goods, it's kind of difficult to price through. Given your competitive positioning in Adhesives, I am a little bit surprised that, that appears to be taking a bit longer than we would have thought. Is there something here to do with contract structure that your adhesive contracts in Adhesives might be slightly longer than peers, and therefore, it takes longer to recover? Or anything you could point us to try and help us figure out the moving parts there?

Yes. I'll start with the second one. And maybe, Marco, you take then the first one in terms of -- to offset the rest of the raw materials and the impact of 2023. So maybe, Iain, when you say you're surprised with Adhesives, if we look on that, what we have guided, if you would exclude the effect of Russia and Ukraine where Adhesives has quite also a good business and you adjust that or you make that EBIT comparable, then we are assuming an EBIT on an absolute level at the same level as in last year. And by that, being able to compensate roughly EUR 1 billion of raw material price increases. So I think that is very ambitious. But due to the fact that we have put it in the guidance, we are convinced that we will make that executable in that time frame. So therefore, I think the price increases, what we're executing are very strong and also absolutely a strength. And I don't think that you will find somebody in the market who is on that level. If you look at last year, we started in Q1 with a level, I think, around 0.8%. We doubled that in Q2. We doubled that in Q3. We came out with a pricing above 5% in the Q4, and we start the year with a 10% price component. And by that volume on prior year level and in the context of Q1 comparison. And when it comes to the contracts, for sure, partially the contracts, they have a linkage to raw material developments, for example, in silver. And I think in the other parts, I think we are using the power adhesives on that kind of business, and therefore, I'm building -- I'm a little bit longer because I think that's absolutely more than competitive, what we are executing in the Adhesives business. And this is something which we take into account. And you know from the past, it takes 3 to 6 months, and there is no change on that, how to pass on the prices. And what -- and I cannot judge and I partly said that already, what peers us assuming in their forecast. And so therefore, I think we are very clear on that. Maybe a little bit long with this, Marco, maybe to the topic -- to the second question of Iain.

Yes. So question was on how would the margin evolve given that also Carsten said, we will work on pass-through in 2023. So it's, of course, depending also how ROCE will further develop. So assuming input costs do not further increase also in 2023, we should see margins recovering in principle, of course. But we do not guide on when exactly we will reach our mid to long-term ambition as also Carsten said before. I think what is important to note is when Carsten said we're going to work on passing through on particular Adhesive Technologies in 2023. That is to be understood in absolute terms. So whatever we have as cost increases from raw material increases in absolute numbers, that is what we're going to try to pass-through in higher prices. But as I said before, that means basically, we still have some margin dilution as long as we don't price over top of that or in case material costs go down again, of course, we will recoup also in what we lost in diluting -- dilution in the margin. So that's how we look at it over a cycle. We will catch up, but that depends a bit how then material prices will evolve. And then we're going to see also how long it takes to get back to the original margins and finally to our mid to long-term ambition. At that moment, we cannot guide on a specific timing.

The next question comes from the line of David Hayes from Societe Generale.

If I could just ask one on Adhesives, one on -- or follow-up on the Russian one, and then if I can just follow-up on a comment you made about retailer reaction to pricing. So the first question, was just wondering -- picking up on the Adhesives commentary just now, I mean, Beiersdorf earlier this week took their guidance down on the top line, they were flagging a significant worries on their customer issues in automotive because of getting their supply chains back up and running. And also are they thing in electronics to that in terms of the China disruptions in Shanghai. So I was just wondering, within that context, are you factoring in similar dynamics? Or is that something which would be an additional risk that you're not actually seeing yet, but maybe they're just anticipating? The second question is a quick follow-up on Russia. You made it clear about the profitability. But best I understand the stranded cost risk, should may be a period of time where you're paying your people, but not operating. Is that a cost that would appear below the line as an exceptional effective? Is that how we should think about that? Or is there no stranded cost risk in that process? And then the other follow-up, sorry, you talked about pushback by the trade on price increase Church & Dwight yesterday were quoting you quite -- numerous times about how you've taken more pricing than others. Is that a U.S. issue referring to that commentary? Or is there other markets you point? So I guess, Germany, I know perhaps it's late in the cycle. Is Germany a more difficult market to get pricing than you anticipated in the consumer side?

Yes. David, a couple of questions, more than happy to take that, and I start with your last one, because I think here I can be short. The comment from my side related to trade or to retailer was more related to Europe, not to the U.S. I think in the U.S., we already started in last year to increase prices in the consumer businesses, especially in Laundry & Home Care. And I think we executed that and I think you see also a big portion in our 10% pricing in Q1 in Laundry & Home Care is also related to the strong pricing of the U.S. And therefore, my comment was more to Europe. And I think you could also read that also in Germany from the specific retailers that they are quite resistant in terms of taking price increases, and that is also maybe to the question of Guillaume at the beginning. When we say why we have been not changing the -- or increasing the outlook for the OSG, because I think we are in the execution of pricing, and that's also what you see in the 10% or the 5% in Beauty, respectively, in Laundry. But what we see is that maybe there will be a pushback in terms of negotiations, which is impacting then the volume. And partly, we could also see that in Q1. And I think that's the situation when it comes to the pricing/pushback situation. So not really related to the U.S. To your first question, and Marco takes the second one with Russia and the stranded cost or the situation in that. If you -- again, I can't for sure explicitly comment what you heard in the -- or what you discussed in other calls, related to the Adhesives part. But I think, first of all, yes, there are -- depending on the part of the portfolio where you're looking different implications. And the broad part in our portfolio of Adhesives is really helping us to also compensate on certain topics and problems. And yes, the China topic and Marco talked about that when we had the discussion about the lockdowns, which are in Shanghai, which can, for sure, have an impact, because we also have a strong business in Adhesives. On the other side, the countermeasures, what we are taking, for example, that parts of our management over teams are within the production side. And by that, guaranteeing also that production is going on. I think these are the things which we are doing in countermeasures. And in terms of, for sure, dramatic changes, we are not related into our guidance. But as Marco said, we expect the normalization on that in the second half, and that is foreseen also in our numbers/in our guidance going forward. Maybe I hope that helps for the both topics. Marco, you take Russia?

Yes, for the Russia situation and regarding stranded costs. So of course, a complex picture. I try to structure that a bit. We will have some continuing operational costs while we still run the business in Russia. And on the other hand, we will still also have some turnover as long as we haven't closed down or divested, so that would be recorded in EBIT and EPS, and that's included in our guidance. Then there will be some onetime cost related to the exit process as such. So that will be including also potentially some employee severance that could include garden leave for people that are not operational anymore in the second half. That will also include write-downs and all these more exit costs that will be adjusted. So that's not included in our adjusted EPS number. And then further to our global organization, also here, we will incur some stranded cost in the second half if the business is not operating anymore from that moment on. And here we have to adjust structures going forward. But, of course, some of that will hit us in the second half, but that is not so material from an overall standpoint.

We will now take our last question from the line of Chris Pitcher from Redburn.

A couple of questions, please. Firstly, on pricing elasticity, it looks very different across your 3 main divisions, with Beauty Care at the highest. But I suspect that is distorted by some of the brands that you're discontinuing. Can you give us an idea of what volume and price would have looked like without the portfolio rationalization? I think you talked about 5% of sales would be lost because of that. And then secondly, on -- sorry, to double back on the commodity costs. But as mentioned, it's a significantly bigger increase than any of your peers. Can we check that there's nothing company specific within that in terms of forward contracts not being honored or the like? And can you give some idea of how you're hedged the commodities into H1 and H2 to give us some reassurance on visibility? Apologies that was covered, my line cut out.

Yes, Chris. So maybe I start with the topic of pricing and elasticity. So first of all, you're absolutely right in terms of that, and I talked about that, that the performance already in Q1 in Beauty Care is impacted by portfolio measures. So it was down on a year mainly due to the announced portfolio measures in terms of the discontinuation of the activities that will not be part of the future business with particular negative impact on the Body Care category. And with regard to the phasing, we have started and the implementation will further continue over the course of the year related to this EUR 200 million. So the elasticity, I think it's -- currently, we don't see any significant impact in the elasticity based on the price increases we have taken. Because what I said, the volume reduction we have seen in Beauty Care, a significant part of that is related to the portfolio measures. But in Laundry and the rest of the Beauty is especially related to one of the comments I made earlier in terms of the negotiations with trade in terms of -- partly also the reluctance to accept these price increases or doing measures in terms of not doing business for a while or promotional and other activities. I think that's the major part on that. And regarding your second question, the commodity/why our impact is higher or/hedging, I think Marco will take that.

Yes. So in our view, it's a pretty normal situation that we are in. So it's not one company-specific event that I would see. Of course, how companies are exposed depends to some degree also on the portfolio on the business they run, but I don't see a particular now specific Henkel event in that regard. If you look at the feedstock development, so the feedstocks that go into what our suppliers need for producing what we buy. I mean, as I said before, I mean, you see dramatic increases of all sorts of categories in the 20% to 50% region on key feedstocks year-over-year. So that is very, very significant, and that will hit the entire industry for sure. And in terms of hedging, what you said, I mean, in H1, that is, of course, some help that we get from hedging, if you want so, so from keeping physical inventories from having contract durations that also reach into the first half and also some protection from contract formulas that we have, so that at least suppliers cannot enlarge margins. And -- but if you look at the feedstocks, even here, the formulas don't help, feedstocks go up 20%, 30%, 40%. And on the contract duration, partly that is also impacted by force majeure at the moment, supplies declare. And I think we referred to that earlier, but also nothing specific, I would say, to Henkel. So first half is protected to some degree, second half, I don't see that very much. I mean, we will be exposed to what we see in the feedstock and our material markets. That's what we try and to assess and that's what we report. And also a bit like end of Jan, we try to inform about that very early as soon as we see that. So that's what we do also today, and that's how we assess the situation, and I don't see that particular difference to the overall industry.

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

So first of all, thank you for your questions, all your remarks. Let me close our presentation with a brief summary of the key points of today. So based on our preliminary figures, we achieved a significant organic sales growth of 7.1% in the first quarter, really driven by strong pricing across all our businesses. But we are operating in a highly volatile business environment. And since we published our guidance end of January, we saw fundamental changes. The war in the Ukraine has broad and far-reaching implications. And as a result, we are exiting our business activities in Russia and in Belarus. The war also dramatically intensified the already drastic situation on the raw materials and the logistics market. And to mitigate the impact from our input cost pressures on our profitability, we are stepping up our countermeasures, including also stronger pricing. All this is reflected and also there in our updated guidance for 2022. And while we are managing our business facing these extraordinary headwinds, we maintain focus on our strategic priorities because we are convinced that we have the right set and the right path of creating purposeful growth going forward, building on our strong Adhesives Technology business and the creation of Henkel Consumer Brands, and we are firmly committed to improving our growth and earnings profile going forward, and this is our clear ambition. We're looking forward to connecting with all of you on Thursday next week. And here, we will not only share more details on our Q1 performance as announced and also while concluding with Marco and myself, we will provide an update on Henkel Consumer Brands. And with this, I would like to really thank you for joining and taking the time for this call. And by that, I can't leave it without saying take care, stay safe and stay healthy and see you next Thursday. Thank you. Bye-bye.

Goodbye.