Beiersdorf Aktiengesellschaft (BDRFF) Q4 2022 Earnings Call Transcript

Beiersdorf Aktiengesellschaft (OTCPK:BDRFF) Q4 2022 Results Conference Call March 1, 2023 2:00 PM ET

Company Participants

Jens Geissler - Head, IR

Vincent Warnery - CEO

Astrid Hermann - CFO

Conference Call Participants

Iain Simpson - Barclays

Guillaume Delmas - UBS

Bruno Monteyne - Bernstein

Olivier Nicolai - Goldman Sachs

Tom Sykes - Deutsche Bank

Celine Pannuti - JPMorgan

Karel Zoete - Kepler Cheuvreux

David Hayes - Societe Generale

Rogerio Fujimori - Stifel

Rashad Kawan - Morgan Stanley

Operator

Jens Geissler

Good morning to all of you. I would like to welcome you to Beiersdorf's Full Year Results Analyst Meeting here in Hamburg. With me this morning is Beiersdorf's CEO, Vincent Warnery, and our CFO, Astrid Hermann. We would like to share with you a review of last year and, of course, the outlook and guidance for the year '23. Before we start, let me make some technical remarks. [Operator Instructions] Okay. So we will start now.

And I hand over to Vincent for the statements.

Vincent Warnery

Thank you, Jens. Good morning. I would like to welcome you to this presentation of our full year 2022 results. I am sure that no one needs to be reminded just how challenging and eventful 2022 was. It was a year marked by the war in Ukraine, geopolitical turbulence, high inflation, dramatic cost increases and numerous bottlenecks in the supply chain. And yet, despite all these challenges, we emerged from 2022 stronger, having managed to achieve remarkable financial results.

For the first time in at least 2 decades, we delivered double-digit organic sales growth. We also fulfilled our promise of profitable growth with an increase in EBIT margin of 20 basis points for the Consumer Business segment and for the group. Both a double-digit growth of 10.5% of our Consumer Business segment and 8.8% growth in our tesa Business segment exceeded the expectations we had set at the beginning of the year. With outstanding performance and profitable growth are a testament to the strong execution of C.A.R.E.+ strategy. We have been focusing on C.A.R.E.+ for several years now taking our skin care business, which has been our core expertise for more than 100 years to new levels.

Thanks to our consistent pursuit of our strategic goals, we are now seeing growth that is both broad-based and balanced. In order to deliver on net sales EBIT targets, we used to be highly dependent on the German NIVEA business and La Prairie performance, yet in 2022, our major growth and profitability drivers were well balanced between NIVEA Europe, NIVEA Emerging Markets, Derma and La Prairie. Each of these businesses makes a meaningful contribution to net sales and EBIT, strong enough to compensate difficult market conditions and to achieve the double-digit growth we have recently experienced.

The consistent pursuit of our strategy means that our business now stands on 4 solid pillars, allowing us to press ahead into the future with more security and confidence. As I previously mentioned, we outperformed the market in 2022 with all brands contributing to our strong growth. This includes both our consumer brands and tesa.

In the Consumer Business segment, all major brands contributed to the strong double-digit growth. NIVEA was plus 9.6%, our Derma brands with plus 23.9% and the Healthcare business with plus 13.1% sales growth, have offset softer sales growth of plus 1.9% in the La Prairie business. The tesa business segment completed the overall strong results with organic sales growth of plus 8.8% for the year.

I will now go through the development of our brands in more detail beginning with our NIVEA business. NIVEA delivered strong broad-based growth of 9.6% in 2022. Both part of the business, skin care and personal care grew substantially. We focused our marketing budgets on our skin care categories, but we were very happy to see that our strategic categories in personal care, including deodorants romance, are also performing well. All regions supported the balanced growth with a healthy mix provided by our core business and our superior innovations such as the NIVEA LUMINOUS630 range.

We also achieved an excellent balance between pricing and volume-driven growth. Gross from price increases was up quarter-on-quarter throughout the year, and we can also report positive volume contribution. Even if we are experiencing NIVEA growth across all regions, including China, I would like to focus here our business development with NIVEA in Japan.

In line with our strategy and with a strong refocus on what we do best Beiersdorf, skin care, our business in Japan is very successful. I would like first to acknowledge the success of our 50-year old joint venture with Kao, a partnership that has allowed us to make NIVEA an iconic local brand while still respecting the global brand equity. This collaboration is a big success story with a joint venture on NIVEA and Kao holding a leading position in many of the key skin care categories in Japan, including body care, all-purpose creams and hand creams. It is also important to note that Japan is dominated by domestic brand, which makes NIVEA exceptional status as the only successful international and best known skin care brand in the mass channel, although more impressive.

Our success with the younger consumers has been noteworthy. And we saw a turnaround in sales in the second half of the year due to our strategic refocus on what NIVEA does best, skin care. We focused on a shift back to our core values and NIVEA equity with Fresh TV and digital commercials, concentrating on family limited design and digital rejuvenation. The outcome was exceptional as we delivered strong results with both NIVEA and NIVEA Men, leading to a 6.7% growth in the second half of 2022.

We're also very proud that with Eucerin and Aquaphor, our Derma business has reached a major milestone by exceeding over €1 billion of sales. This accomplishment is not only impressive in itself. It has also happened much earlier than planned. As a former board member for Derma, I'm especially proud of this success. It was my ambition to reach the €1 billion target by 2025, and we achieved this goal in 2022, 3 years earlier than planned.

Our Derma business generated exceptional double-digit growth in all regions with a remarkable 23.9% organic sales growth in 2022. Our strategy of capitalizing on the potential of the Asian market and our digital-only approach in China has paid off. We delivered superior growth of 44% in China compared to the previous year. Similar to NIVEA, Derma recorded very balanced growth, remarkable innovations such as Thiamidol remain 1 of the primary performance drivers in 2022. That said, our core products, include Sun also performed exceptionally well, and our strong e-commerce business grew by 29%.

Also, we face dynamic challenges in luxury segment with COVID-related restrictions and lockdown in China, heavily impacting both Q2 and Q4 we nevertheless managed to grow our La Prairie business slightly in 2022. We use 2022 to strengthen our distribution network. We have opened a number of new doors at strategic locations in China. In Hainan, for example, we now have a total of 10 doors. In the fourth quarter, we opened our U.S. 1 in Haikou. We will further extend our distribution in 2023 with a core aim of enlarging our city coverage in China from 35 to 42 cities. We also diversified our China in 2022 with a stronger focus on e-commerce. Our Tmall platform, so continued dynamic development, growing by 45%. The new online JD.com flagship store also performed very strongly in Q4 following its launch in Q3.

Fuels by China's partial reopening to the world, we see encouraging signs in the global travel retail business and the first signs of recovery in Mainland China. After a very volatile January with traffic still heavily impacted by the release of COVID restrictions in December. We see a clear turnaround in retail sales starting in February China is back to growth, not only online but also in brick-and-mortar.

Extraordinary achievement considering that the traffic is still at minus 40% versus pre-COVID times. Based on this development and given the fact that Shanghai lockdown started in March last year, we expect a strong exit rate towards the end of this challenging first quarter.

Looking further ahead, we are very confident to see a clear rebound starting Q2 and an even stronger momentum in the second half of the year, where we believe the biggest impact from China outbound tourism we learned. An important milestone in the execution of the C.A.R.E.+ strategy was last year acquisition of Chantecaille. The premium skin care brand has been an exceptional addition to our Beiersdorf family perfectly complementing our premium skin care business. In 2022, we made significant progress in integrated Chantecaille's operation, we formed a global management team and laid the groundwork for substantial growth for the years to come.

Moving into 2023. We are focusing on the U.S.A. and China as core markets to drive growth as Chantecaille is perfectly positioned in those 2 regions. The brand's strong e-commerce position is also very attractive as it generates a 1/4 of total sales in e-commerce. We are actively pursuing our digital transformation and our efforts in recent years have been paying off, particularly in our e-commerce business. Since 2019, we have more than doubled the size of our e-commerce share of the Consumer Business segment.

In 2022, however, we faced several challenges. This included consumers returning to brick-and-mortar stores, capacity and inventory constraints for key e-commerce customers and volatility in China due to lockdowns and reopenings. Nevertheless, our e-commerce share reached an all-time high of 11.6%. In the past fiscal year, we saw significant growth of 17% in e-commerce, positioning us as 1 of the top performers in our industry.

Our emerging markets online business is a particularly strong growth engine with a remarkable 42% growth rate. We note that this development continues to outpace growth in off-line sales with e-commerce growing almost twice as fast. This trend underscores the importance of e-commerce for Beiersdorf and our continued success in the digital marketplace.

Our successful approach to precision marketing has helped us growing efficiently in e-commerce. With this marketing model, we are focusing on delivering the right message to the right people at the right time and at the right cost. Putting this concept to work in various campaigns has made our efforts more efficient, and we have achieved better sell-out. By adopted a more targeted approach, we have eliminated ineffective advertisements and thereby increase their relevance. This has significantly increased effectiveness of our marketing spend. In 2022, we spent more than half of our advertising budget on digital media, which represents a 25% year-on-year increase.

Turning now to our emerging market regions. In 2022, we continued our success in Latin America. There, we saw a strong growth rate of 29% compared to 21% and an exceptional growth rate of 60% compared to pre-COVID levels. Our success story in LatAm is based on 3 drivers: focusing on the skin care building on our strong brand value and taking full advantage of the fast developing e-commerce and digital environment in the region.

And we have used insights gained from the LatAm markets to further exploit market potential in white spots such as India, Africa and Indonesia. Speaking of Indonesia, NIVEA has been present in this country since 1920, our products were initially imported and distributed in cooperation with a number of local distributors. In 1979, however, we established a joint venture with a local player and started local production in 1980. I'm happy to announce that last month, we acquired the remaining 20% shares of our Indonesian affiliates, PT Beiersdorf Indonesia from a former JV partner.

Now with full ownership of the company, we are in an excellent position to tap into the potential offered by the Indonesian market. A strong growing population, 1 of the fastest-growing and largest skin care market in the world and a true white spot for NIVEA. Last year, we also expanded and modernized our production center in Milan. We expect all this to lead to even stronger growth across all categories. Not only have we expanded our position in regional markets, but we have also increased our innovation strength.

In 2022, after years of successful collaboration, we acquired the majority stake in S-Biomedic. This is a life science company and a leader in the field of skin microbiome research. Having recognized the potential of the skin microbiome in skin care early on in 2018, we invested in S-Biomedics within the scope of our corporate venture capital activity. Now with the acquisition, we are strengthening our expertise in the field of acne treatment and increasing our innovative strengths in line with our C.A.R.E.+ strategy. We are very excited to be joining forces in the dynamic and promising field of skin microbiome.

Sustainability is, of course, extremely important for us, and we are investing heavily in emission reduction along the entire value chain. We aim to reach a 30% reduction in absolute term by 2025 and this is 1 of the most ambitious targets in the industry. Today, I'm very proud to announce that despite delivering our best growth performance, we achieved a 17% reduction by the end of 2022 compared to our base 2018. An important aspect in this context are our products by reworking our packaging and formulas.

We have managed to decrease our carbon footprint and make our climate engagement tangible to consumers on a product level. Here are 2 examples. From a packaging point of view, in our NIVEA Shower range, we have implemented lightweight packaging that needs 25% less material. Of course, the material we use is recycled plastic. With this smart new solution, we have lowered packaging-based CO2 emissions by 32%.

From a formula perspective, we have reworked 1 of the most iconic formulas, Nivea Soft, which is loved by millions of consumers across the globe. How exactly do you make a formula more climate-friendly while retaining its excellent skin care benefits and the sensory experience that consumers expect it was definitely not an easy task, but we persevered and succeeded in bringing a new, more sustainable version to the market with an overall CO2 emissions reduction of around 40%.

So as you can see, in 2022, we put a great deal of effort into realizing our sustainability goals as part of our Care Beyond Skin sustainability agenda. We are proud and delighted to have received a AAA rating from the renowned non-for-profit organization, CDP. From over 15,000 companies, we are 1 of the only 13 worldwide to have achieved AAA scores for target setting, performance and transparency in climate change, deforestation and water security. Over recent years, we have made significant efforts globally to drive the transformation of our business. CDP's AAA rating is a tribute to our efforts to become a leader in our industry for environmental sustainability, by setting ambitious targets, taking action and being transparent.

To conclude this -- very first part of this presentation, we had a very successful fiscal year in which we not only achieved excellent results but also made significant progress on our strategic priorities with our 4 main business pillars, NIVEA Europe, NIVEA Emerging Market, our Derma brands and La Prairie, we have clearly demonstrated that we are strong enough to master dynamic market conditions and to achieve double-digit growth even in uncertain times.

I will now hand over to Astrid, who will take you through our 2022 financials in more detail.

Astrid Hermann

Thank you, Vincent. A warm welcome also from my side. I'm looking forward to guiding you through our strong 2022 financial results. At a group level, we increased our sales organically by 10.2%. In nominal terms, this represents an increase of 15.4%, thanks to favorable exchange rate effects and structural effects mainly from our Chantecaille acquisition. At the same time, we significantly improved our absolute EBIT and profit after tax results. Accordingly, the group EBIT margin, excluding special factors, increased by 20 basis points to 13.2% and the profit after tax margin to 9.4%. Our earnings per share, excluding special factors, therefore, rose from €3 to €3.56.

Looking at the individual segments, we are pleased to report significant profitable growth in our Consumer Business segment. Outstanding organic sales growth of 10.5% boosted our profitability here in 2022. Thanks to consistent pricing initiatives and strict cost management, we were able to offset a large part of the additional input cost. And thus, as guided, we achieved a slight margin expansion of 20 basis points in 2022. At the same time, we continue to invest in our strategy and laid the foundation for future profitable growth.

Driven by a strong second half of the year, tesa also achieved impressive organic sales growth of 8.8% in a challenging market environment. Favorable currency effects were the main reason for the nominal growth of 11.3%. At tesa, we also continued to invest in our strategic pillars of innovation, sustainability and digitalization and in order to prepare our business for future growth. This resulted in a slight slowdown in the EBIT margin by 20 basis points.

Let's take a closer look at the results of our Consumer Business per quarter. For the full year, we achieved organic sales growth of 10.5% versus an already strong basis the year before. For the first 3 quarters of 2022, we report steady and strong double-digit growth. The fourth quarter delivered growth ahead of our expectations despite a slowdown in China for our La Prairie business. Total organic sales growth, excluding La Prairie in the fourth quarter, amounted to upper high single digit.

Let's take a closer look at the fourth quarter performance of our main brands in the consumer segment. In Q4, NIVEA sales grew organically by 6.1% despite recessionary fears, customer conflicts in Central Europe and the negative COVID impact from China. By category, Sun and Lip once again outperformed within the skin care business, whereas deodorants drove the performance in the personal care portfolio. Emerging markets stood out and made the biggest contribution to total NIVEA growth in Q4.

With 19.7% sales growth, our Derma brands continued to grow strongly in the fourth quarter. Once again, business in the U.S. around our Eucerin and Aquaphor brands posted stellar results. We saw positive momentum in our recent launches, the Thiamidol pipeline and our Sun category, which accelerated considerably, especially in Latin America. These results are underpinned by ongoing market share gains in key categories across the globe. Our Healthcare business finished 2022 with strong growth of 15% -- 14%, sorry, in the last quarter. Our top 3 countries in Healthcare, Germany, Australia and Indonesia again led the development in Q4, although Latin America also posted impressive growth rates.

As previously mentioned, La Prairie had a challenging fourth quarter, impacted by numerous COVID-related restrictions in Mainland China as well as in the travel retail business around Hainan and Korea. That said, we saw positive momentum in the rest of our global travel retail business. Moreover, sales in European countries continued to recover. Our most recent launch of Skin Caviar Harmony showed excellent results across all markets.

Next, let's take a look at our performance by region. First, all of our regions recorded positive growth and contribute to our strong overall increase in revenue. In Europe, organic sales increased by 5%, leading to sales of €3.1 billion. In Western Europe, organic sales rose by 5.3%. Good growth rates were achieved in Great Britain, Spain and Italy, in particular. Sales in NIVEA Deo, Sun and universal creams as well as in the Wound Care categories in the Healthcare business developed especially well. The Eucerin Face, Body and Sun categories also contributed significantly to sales growth. Organic sales in Eastern Europe were up 3.7% on the previous year.

This trend was driven by strong growth in Poland and Romania. NIVEA and Eucerin developed well in the region, while the conflict in Ukraine had a negative impact on growth in Eastern Europe. In the Americas region, the Consumer Business segment achieved strong organic sales growth of 23.2% and €1.8 billion of sales. Both North and Latin America are on track to soon become €1 billion regions.

In North America, positive organic sales growth of 17.6% was driven by all of our brands with double-digit growth for Eucerin, Aquaphor, Nivea and Coppertone. With 28.6% organic sales growth, Latin America was once more the region with the highest growth rate. An increase in sales were seen in all countries with Brazil and Mexico continuing to stand out. Both NIVEA and Eucerin were strong growth drivers in this region. Sales in the Africa, Asia, Australia region grew by 10.2% in organic terms, leading to €2.2 billion of sales. Sales trends were particularly positive in Indonesia, India, Nigeria and South Africa. These -- the sales developments of NIVEA and Eucerin in China was also very encouraging.

A glance at our income statement clearly shows that the cost of goods sold has risen significantly due to input cost inflation, both in absolute terms and as a percent of sales. Despite our significant investments in marketing and research and development, our strong sales growth and efficiency gains helped improve the ratios.

General and administrative expenses increased due to significant investments in the new business model and our key strategic pillars of sustainability and digitalization. Overall, we managed to grow our EBIT in both absolute and relative terms and our profit after tax further accelerated this growth on the back of a better financial result in 2022.

Let us now turn to the development of the consumer gross margin in 2022. Unsurprisingly, the gross margin decreased by 100 basis points year-on-year due to last year's significant input cost inflation. However, thanks to consistent global pricing policy, mix contribution from NIVEA skin care business and the excellent Derma performance we could offset nearly 3/4 of the inflationary effect on input cost.

We are proud to report a further decrease in our working capital despite a very challenging year in terms of logistics and raw material availability. While we have increased our inventories to secure material supply and optimize our service levels, our efficiency improvements, particularly on payables have ensured the year-on-year improvement in working capital.

Let's continue with our tesa business. I have already mentioned the strong organic sales growth of 8.8%. The industry business grew by 10%, which was mainly driven by robust demand in our Automotive business in the second half of the year and continued high sales in our Electronics business throughout the year. Key growth driver was the Asian region and China in particular, where demand rose sharply after the lockdowns in April and May last year. But also the Consumer business grew by 5.1% in a declining market. The tesa gross margin was roughly at 2021 levels as we were able to pass on significant part of the input cost increases. Due to strategic investments in the automotive business, digitalization and sustainability, leading to 13% higher R&D spending, tesa's EBIT margin came in slightly below prior year's level.

Looking ahead, these strategic investments will help tesa to continue to develop superior solutions in both its consumer and industry businesses. One new key topic in tesa's consumer business which accounts for approximately 1/5 of the total tesa business is sustainable packaging. The mail order business is booming. Accordingly, adhesive tapes and tear strips for packaging need to become more sustainable in order to be included in the recycling process. Tesa is the leader in this area with innovative product applications that are both bio-based and recyclable. The successful packaging rate of tesa is sold to both the consumer and industrial customers.

In the industry business, 1 focus is on display solutions. Tesa specializes in the bonding of displays for a wide range of applications in the automotive and electronics industries. For the bonding of large displays and digital applications in modern vehicles, tesa meets the requirements of the latest generations of displays by integrating multiple functions such as light and heat management as well as sustainability aspects. Tesa develops adhesive solutions that can be easily detached if necessary and can therefore be repaired or recycled. With debonding on-demand solutions, tesa helps its customers to produce more sustainable products.

I will now hand over to Vincent for his closing remarks.

Vincent Warnery

Thank you, Astrid. So we have taken you through our numbers and achievements for 2022. So now let's take a look at the current year 2023 from both a strategic and a financial perspective.

Looking ahead, we expect volatility to remain high throughout the year, global supply chain constraints, recession fears and geopolitical turbulences will continue for some time. However, on a positive note, we expect the reopening of China to have a material impact on our business in 2023. While we cannot control macroeconomic trends, we can prepare for them and be ready for opportunities when they arise. This is why we will fully implement our new operating model in 2023 in order to streamline our processes and lift efficiency opportunities.

One aspect for the Hamburg organization is our new headquarters where we will bring all our teams and expertise together under 1 roof. At the same time, we are investing in our 3 biggest production centers, extending capacities in order to fulfill rising consumer demand. Following good progress in investing in M&A opportunities and innovation, such as with Coppertone, Chantecaille and more recently S-Biomedic, we are keen to pursue more opportunities in the coming year while accelerating growth and commercialization of the recent investment.

As you are certainly aware, we have been having intense discussions with our Board about alternative uses of our capital. For the first time in many years, these topics are on the table. And even though we have no short-term announcement to make, we look forward to updating you on these discussions going further.

Let's now turn to the guidance for this year. As mentioned earlier, we have broadened the basis of our Consumer Business portfolio. Overall performance has become less dependent on individual brands, channels or regions than in previous years. This makes us confident about 2023 despite persistently high volatility in the markets. We expect sales growth above market in 2023, and we are very pleased to see a strong start of our Consumer Business segment with double-digit growth year-to-date.

For the full year 2023, we expect organic sales growth in our Consumer Business being in the mid-single-digit range. The EBIT margin, excluding special factors, is expected to be 50 basis points above the previous year level, which is in line with our midterm goal for profitable growth. The main drivers of profitability will be continued pricing albeit at lower levels than last year and a positive mix impact from more skin care across the portfolio.

For the tesa business, we expect sales growth to be in the mid-single-digit range. The EBIT margin, excluding special factors, will continue to be impacted by ongoing investments in tesa's main strategic pillars, innovation, digital and sustainability, consequently, the EBIT margin will be slightly below previous year's level. Based on this forecast, for our business segments, organic group sales growth is expected to be in the mid-single-digit range and the consolidated EBIT margin, excluding special factors, will be slightly above the previous year level.

I will now hand over to Jens for the Q&A.

Question-and-Answer Session

A - Jens Geissler

[Operator Instructions] The first question comes from Iain Simpson at Barclays.

Iain Simpson

A couple of questions from me, if I may. Firstly, could you -- as we think through the year, give us a sense of the Chantecaille rollout, what you've already done with that brand? What you hope to do with it over the coming year and maybe a bit longer and where the kind of white space opportunities are and how it's performing. Also, if you could give us any color on the phasing of China rebound, both in terms of domestic China consumption but also Hainan and wider travel retail, that would be great. And then a very quick housekeeping question, if I may. How should we think about likely FY '23 finance hedges for this year?

Vincent Warnery

Thanks, Iain. I will take the first 2 questions, and Astrid will take the third one. Chantecaille is doing well. One of the priority for the last year was to build the team. So we've been able to recruit the full leadership team and we stop profiles coming from the industry. So now we are fully settled. We also were able to make a good start in the U.S. where we have our stronger business, we're doing extremely well in the U.S. retail and then extremely also with our e-commerce site, Chantecaille makes 25% of our sales.

What was more difficult last year, obviously, is China and Korea where we lost some sales. But we are fully ready to get to new momentum, not only in China and the U.S., but also we are looking at new countries where we could expand the brand. So everything is in line with expectations and more to come in the years to come.

On China, we are pretty optimistic. When I look at the retail sales of February in China, where we grow double digit. When I look at the -- I would even say the explosion of areas like Hong Kong and Macau, where we doubled the sales, we clearly see that the China is back. It's back obviously in brick-and-mortar. That's the most important thing for the Chinese business has never been away in our e-commerce business.

As I said, we are growing strongly with Tmall, with JD.com and also shown with TikTok. But also, we see the Chinese tourists starting to go abroad. Hainan, we are flying. I mentioned Hong Kong, Macau. Japan also, we see some growth. So as I said, we are expecting the month of March to be a turnaround. We expect to finish March with very good figures. And then second quarter and even more second semester should be extremely loyal. We had the story with La Prairie that immediately after a difficult quarter, we had an extremely strong quarter because of the business model of La Prairie makes our consumer extremely loyal. They are not waiting for promotions. They just go back to store as soon as it is opening. So good optimism regarding China. And as we mentioned also, we are doing extremely well already with NIVEA and Eucerin.

Astrid, on the last question?

Astrid Hermann

Good morning, Iain. Unfortunately, I have to ask you to repeat the question. I understood something about Europe and I didn't hear the entire question. Do you mind repeating it? Iain, did you hear me properly. Good morning, Iain. Would you mind repeating your question again. Unfortunately, I didn't completely hear it, the last question.

Iain Simpson

Of course, I just wondered what finance income might be this year given your sort of large cash pile in the rising rates environment?

Astrid Hermann

Yes. We certainly -- you see that we already delivered positive financial results this year, and we obviously continue to think we will do so more strongly even in the year 2023.

Jens Geissler

Yes. So we move on to the next caller. We move on to Guillaume Delmas, please.

Guillaume Delmas

Two questions for me, please. The first 1 is on your volume growth development in the fourth quarter. In particular, if you could provide a bit more color on NIVEA and from a regional standpoint on Western Europe. For Western Europe, I get to a low single-digit organic sales growth number in Q4. So something less than 2%. So wondering if volumes went down significantly in the fourth quarter, what you would attribute that to? And how should we think about 2023? So is it going to be mostly a year, particularly for regions like Western Europe, where at least in the first half of the year, growth will be entirely price led?

And then my second question is on your 2023 operating margin development in consumer. Firstly, I mean, is it a change of semantic? Because if I remember well, in June, back in November last year, you were talking about at least 50 basis points. The press release this morning in your presentation, you talked about 50 basis points above. So is there any kind of change of wording that we should pick up on?

And then more broadly, on your margin development in 2023 and Astrid maybe can you walk us through the key building blocks for this year, as in is it fair to assume that it's going to be mostly gross margin led with a significant step-up in advertising and promotional spend as a percentage of sales baked into your guidance? So any color on that would be helpful.

Vincent Warnery

Thank you, Guillaume. I will take the first question on the volume and then Astrid will take the second one. On volume, obviously, the decline in volume in the fourth quarter is driven by 2 brands, NIVEA and La Prairie. So La Prairie, obviously, you saw the figures and the lockdown in China at an immediate effect on the volume. So no big surprise here. On NIVEA, what is interesting to see that, yes, we were at the peak of the price increase.

But what I can say again, in was a discussion we had last year in June, I can say I can confirm that we didn't see any price sensitivity. The volume declines are purely due to Russia on 1 hand, but also Germany, where we had some I would say, a tough conversation with retailers and some temporary conflicts. So we lost some promotion. We lost also some temporary listing, which drove the loss of units. If you exclude those 2 elements, so Russia and Germany, we are flat in the fourth quarter in volume and progressing strongly in value.

So that's a good news. In 2023, we are pretty optimistic because we are planning to do price increase but in a much more moderate way because obviously, we have the carryover of the 2 successive price increases we did in '22. So here, we expect, we are back on shelf with those retailers, which with whom we had some issues. We are back on promotion with the big events across the year. So we are expecting to go back to a good speed volume value. On the second question, Astrid?

Astrid Hermann

Sure. So thank you so much on the question. Our operating margin for consumer in 2023. As you know, during the Capital Markets presentation, we really talked about the future in the next few years, midterm. And during that span, we have this ambition and continue to hold on to that ambition of at least 50 basis, absolutely. Now every particular year we need to look at. And in this year, we feel confident about delivering the 50 basis points. We will need to see, obviously, beyond that, how the year develops.

And in terms of the building blocks, I think you mentioned already, some clearly, we need to continue to narrow, and we have the ambition of overcoming even the small gap we did have in gross margin in last year. So it's clearly pricing and mix need to help us get positive again on a -- from a gross margin perspective. And absolutely, we continue to want to invest in our business. Looking to invest, obviously, behind advertising, as you've mentioned, as well as our key strategic pillars.

Jens Geissler

Thank you. Next line is Bruno Monteyne of Bernstein.

Bruno Monteyne

Two for me. So first, coming back to the volumes you said of said it was flat excluding Russia and Germany. But if I look at both the U.S., so what volume like in quarter 4 in the U.S.? And can you also comment on the directional change from quarter 3 into quarter 4, did volumes remain as robust as in quarter 3? Or was there a market step-down in volume growth in the fourth quarter?

My second question is around the cash return policy on which you alluded to at the end, Vincent. You probably know you're driving shareholders mad with the kind of delay in the tantalizing hope. So I'll try to probe a bit deeper. First of all, what are the parameters of the debate you're having about potential to -- what is holding back the kind of the timing to start discussing these models? What are the potential options? Can you give any more background of how the debate is being had? And second of all, can I consider this an announcement about making a future announcement about the cash return policy because you've seen somewhat stronger and suggesting that you'll be coming back in the near-term future on this topic?

Vincent Warnery

Bruno, I'm so interested by your second question that I will leave the first question to Astrid and she will answer in a few minutes. Allow me, Bruno to take you through my journey as the CEO. The first -- my first mission was to deliver growth after years of flattish growth and underperformance versus the market. So you saw last year we achieved with 8.8%, the second best ever year of the history of Beiersdorf, and this year, the best ever year. And I think you felt Bruno, that we felt pretty optimistic regarding 2023. So I would say mission accomplished, our mission on the way to be complete.

The second element, which was also something you rightly challenged. If you look at the last 20 years before 2019, we did only 1 acquisition, which was C-BONS in China which happened not to be really successful. Since '19, we have done Coppertone, we have done Chantecaille, we have done S-Biomedic. We just bought 20% Indonesia, and we are working on some very nice projects also. So clearly, the M&A obsession ambition is on the agenda. And I think in a way, we are also ticking the box in comparison with the past.

Third element, growth, profitable growth. We did 2 margin resets and we told you beginning of last year that we will increase profit, some of you had some doubts about that. We did it and we are promising also to increase at least EBIT by 50 basis points every year, which obviously is something a bit new when you think about Beiersdorf.

So now I'm facing my fourth challenge, which is not only to increase dividends, but to do a better use of the cash. So dividend, there are a lot of things on the table. We are working hard on that. We have big discussions with our shareholders. So I mean you know that Rome was not built in 1 day. Give me a little bit of time. We are coming. We are working, and I hope to come back to you in the coming months. On the first question?

Astrid Hermann

Yes. So Bruno, on the question of volume in the U.S., in Q4, we had positive volume in the fourth quarter in the U.S. strong growth -- double-digit growth overall and particularly strong volume growth in our Derma business but also in the NIVEA business. So we continue to be very happy with our U.S. performance.

And in Q4, yes, the volume trends certainly became more challenging, but it really was driven by what Vincent already discussed or the impact, obviously, from Russia as well as from the customer negotiations, particularly in Germany and France. When we're looking at the rest of the business, we continue to see also very strong volume growth. Western Europe, for example, U.K., Italy, Spain, really fantastic performance and no indication at all that pricing is having an impact on volume at the moment.

Jens Geissler

We move on. Next in line would be Olivier Nicolai at Goldman Sachs.

Olivier Nicolai

Just a couple of questions. First of all, just following up on your earlier comments regarding China reopening. What should we assume for the La Prairie brand in 2023? Could the brand go back to double-digit growth? And what would you expect the brand to become a billionaire brand? Second question is just on Europe and pricing. Obviously, a lot of negotiation with the retailers have just ended. Could you please comment on the pricing outlook for NIVEA and if you're expecting any delisting?

Vincent Warnery

Thanks, Olivier, for the 2 questions. On your question on La Prairie, yes, this is -- we hope that we could achieve double digit. This is what we have in mind. We are highly dependent, obviously, on the rhythm of Chinese tourists going back to travel. While we are pretty optimistic, as I said, about China Mainland, about China, Hainan, about Hong Kong, Taiwan, Macau, Singapore. We are, of course, optimistic also regarding Japan and Korea. We are still waiting to see what happened in the area of travel retail. So this is why I think the turning point will be March where we will clearly see the -- out of this lockdown. We have this lockdown comparative. You remember lockdown started in Shanghai in March. This is where we'll see what happens. When you look at the past, I look at the past at La Prairie, this is always what happened. So this is why we are pretty optimistic.

On your second question, we are -- you must know, and this is -- for some of you, you know the company since a long time. This is, in fact, the first time we are increasing prices at NIVEA. We used to be always -- not really the 1 pushing the pricing agenda, increasing prices slightly, but also giving commercial conditions. What we have done in 2022 was something we have never done in the past, and we did it. We did it in '22, in all our countries and particularly also in a country like Germany. So we have done that. We have been able to close all our negotiations, for example, in Germany last year.

We are negotiating the price increase of 2023 now. And we have pretty good reasons, even better than expected because I think the way we work with retailers, the way also we are transparent on the IC on the cost of goods increases and the fact also that NIVEA is a very important brand, obviously, for German retailers, is putting us in a positive situation. So we are good. We should go through the price negotiations. And we should have, again, as Astrid said, a pretty good effect on the gross margin, combined with the carryover of the price increases we did in 2022.

Jens Geissler

Thank you. Our next call would be Tom Sykes at Deutsche Bank.

Tom Sykes

Just a couple of technical questions, please. Just on the depreciation, I think that was actually flat for the first time since 2015, so a pretty meaningful benefit to the margin. What's the forecast depreciation number, please? And then just on the work is, but on the Sun business, presumably, you had lower returns to retailers this year, perhaps at the end of the Sun business. Could you maybe say what benefit that was year-on-year, please, in H2?

Astrid Hermann

Tom, I will take both of those questions. So depreciation in this year will -- is forecasted to increase. As you might know, we have talked about this. We're investing significantly in our manufacturing footprint. And actually, in Q2, a very big plant in Leipzig will go online later in the year, followed by other plants plus Mexico. So our depreciation certainly will go up. What you will see though is significant improvements in cost as we continue to ramp up those plants as well. We will be taking volume in from our third-party manufacturers and so on. So we will see a benefit there as well.

In terms of lower Sun returns, yes, we had a very good Sun season this last year. This clearly also impacted the inventory left at the end of the season, which was fantastic, and we saw an improvement there. It's not a significant improvement in that sense, but it was -- it did help our margin as well.

Vincent Warnery

And Tom, if you allow me, I mean the interesting thing in Sun and reading your paper yesterday is that being strong both in mass market and Derma, and you know that we launched Eucerin Sun in the U.S. We were able, in fact, to build on the trend you were describing of these Derma brands taking over the market share. The way we drive the business with the same organization NIVEA Sun, Coppertone and Eucerin Sun is allowing us really to occupy the space. And this is where we had an outstanding year, both on NIVEA and Eucerin and gaining market share on both brands in each and every country against our main competitor.

Jens Geissler

Thank you. So we move on. We have Celine Pannuti, JPMorgan.

Celine Pannuti

I'm sorry if I'm asking questions that have been asked, I've not been 100% following everything so apologies in advance. My first question is I heard you talking about double-digit growth at the beginning of the year for consumer as well, you seem to be quite positive about China recovery. So mid-single digit or around mid-single digits for consumer. I'm just wondering -- like what is it that number that you have in terms of China assumption for the year? And mid-single digit sounds quite low given what seems to be a very strong start to the year. So is there anything that you are expecting? I don't know maybe a tough comp because of comping some of '22. So that would lead you to grow mid-single digit in that division in '23?

And then my second question is on A&P spending. I don't know if you have mentioned that in the call, but are you -- how was '22? And I saw that you are looking at efficiency in media. But how should we look at that run rate and that ratio to going forward?

Vincent Warnery

Thank you, Celine. As you know, we always prefer to underpromise and overdeliver. We see, obviously, we are optimistic regarding 2023. China is still a question mark, not so much if they will come back to growth, but when they will come back to growth and it has a big influence on La Prairie. So -- and that's something we have to look at. Again, as I said, February is extremely strong, so it makes us optimistic.

Yes, we have done a fantastic year in Sun last year. Are we going to do the same. We are putting ourselves in a position to do the same. And the first Celine extremely strong. So we are pretty optimistic. So we -- today, to be transparent with you, we don't see any reason why we should not deliver a very good 2023. On the second question?

Astrid Hermann

A&P spending. In 2022, we added nearly €200 million on top of a very strong increase already in the year 2021. So significant money towards our A&P spending in supporting the business. That said, we also had very, very strong sales growth. And then certainly impacted the ratios, ratio was at 25.9% for the consumer business. We also shifted significant amounts of spending into digital media as already presented also by Vincent and saw significant efficiency gains and driving the business through that. And we will obviously continue on that journey also in '23. We think we will hold or slightly improve that ratio in 2023, again, also being very flexible and making sure that we support the business appropriately.

Jens Geissler

Thank you. So next in line would be Karel Zoete at Kepler Cheuvreux.

Karel Zoete

I have a question with regards to your innovation agenda for 2023. Can you -- because you still have a couple of big innovations from recent years that you can leverage on in the current season. But can you speak a bit about the agenda for this year, what we can expect in terms of big launches and rollouts?

Vincent Warnery

So you've seen that in the recent history of Beiersdorf, this famous W630 ingredient has been magical ingredients. So we have been able to use this ingredient in specific formulas for La Prairie, for Eucerin and for NIVEA. We have achieved this year in 2022, together with the 3 brands, the best ever launch in the history of Beiersdorf, combining the sales of Eucerin, Thiamidol, NIVEA Luminous and La Prairie Luminous.

So we are continuing to develop this range, extending it to other product categories to acne, for example, non Eucerin to body and to Men in NIVEA and a also developing new formula for La Prairie. What is also even very important for us. I mentioned that already in past calls, we are developing also the regulatory revert in China. And today, we are only selling these products on the cross-border, the moment when we can go on the local e-commerce, which, as you know, is 92% of the total e-commerce ecosystem in China. It will make a huge difference. On top of that, what we are doing also this year, which is different from the past years, we have a good mix of innovation renovations.

I mentioned NIVEA Soft. NIVEA Soft is an iconic product. This is the #1 product in the range. We are innovating the formula, sustainable, new packaging, new story and is starting to sell extremely well in Germany. We are also renovating a very important part of the business, which is linked to body where also we're coming with new sustainable formula and a new marketing story. What also we are doing right now in Europe is the relaunch of Q10, it used to be before Luminous our best or biggest franchise. It has been a little bit losing ground over the years. We are renovating the formula with a new bond full product for eye, for eye wrinkles which we are expecting a lot from this product.

On top of that, we're entering into new fields. We are launching a new range on NIVEA for acne, which is called Derma Activate, which is also a new territory, allowing us also to rejuvenate the NIVEA target. So you see a good mix of W630 big, big priority and then innovation, renovation on each and every brand in order to continue to grow the momentum of our brands.

Jens Geissler

Next caller this morning is David Hayes at Societe Generale.

David Hayes

So 2 for me. Just coming back to the A&P spend, and I think equated to 26% of consumer sales. I think the CMD, the number of 27% was mentioned. And I guess the question is, is that still sort of a target for the next couple of years? I guess, I'm thinking running into 2024 with W630 being permissioned in Mainland China, and I guess the full year of La Prairie undisrupted in terms of lockdowns we assume by then. Is that sort of the progression that we should still be thinking in terms of additional brand support?

And then the second question just on Eucerin, obviously credit by good, but arguably slowing a little bit, I think, in Europe specifically, a little bit slower demand. So just a question whether the active category is coming off a bit of a tear post-COVID. I think we spoke about this before that. For some reason, I feel the category had a really good support through health focus COVID. Is it fair to say that we're seeing consumers moving back to more or less active products over the last few months?

Vincent Warnery

David, Astrid will take the first question, and I will take the second one.

Astrid Hermann

Yes, David, as we mentioned, we obviously really are supporting our business very, very strongly. We've had very strong sales growth this year, which -- or in 2022, which certainly puts some pressure downwards on the ratio itself. But in terms of absolute what we've put behind the business was very significant. And additionally, as I mentioned, significant improvement in terms of the efficiency of how we use our media, and we will continue to work on that. We are also continuing to add more and more to working media. So what we really spend in terms of engaging with the consumer is very, very strong and is increasing in 2023 as well.

But we will also work on obviously continuing to drive our media more effectively and more efficiently. So we'll have a balance there. We mentioned 27% in the Capital Markets Day. Obviously, that was under the current -- that parameter of where the size of business was at the time. We will continue to look at that and certainly be in that range of 26% to 27%.

Vincent Warnery

On your first question, David, absolutely. No worries at all. We are -- the markets are growing everywhere. There was in the last quarter, only Germany, which was down as a market. It was a moment also where all German consumers were extremely afraid of energy crisis. And the overall, I would say, mood of consumers was pretty low both in mass market and Derma and luxury. We are seeing -- in the beginning of the year, it's outstanding. Not only the market is going well, but we are doing extremely well. So I'm expecting a fantastic year again for Derma in 2023. The consumers are there, they stay, they love the pharmacy environment, they love the drug store environment. So this is really, again, strong safety to have such a strong Derma business, which as you might have seen, has been also able to overperform all our competitors in 2022 for the first time in the history.

Jens Geissler

The next question will come from Rogerio Fujimori at Stifel.

Rogerio Fujimori

I have a follow-up question on gross margin for Astrid. I think your '22 consumer gross margin bridge slide shows 250 bps from pricing, 40% mix and I think 390 bps input cost inflation. So could you talk about how do you expect these drivers and in particular, the input and logistic cost inflation to impact gross margin in '23? And any H1 -- H2 dynamics that we should keep in mind?

Astrid Hermann

Yes. Thank you so much for your questions. So just as a reminder, at the beginning of last year when we saw the very significant rise in input cost inflation, we set ourselves a target to essentially achieve somewhere around 3 quarters, 80% of coverage for the impact that we saw from costs. And we made that happen. So through pricing and mix we were really able to offset 3 quarters of the impact, which is really good.

In terms of 2023, as we've mentioned, we'll have obviously a carry impact from pricing, and we will take some further pricing we need to in order to offset more of the cost increases. We will also see positive mix we continue to drive our skin care business clearly, which delivers higher margins. We're continuing to drive our Derma business, which has very, very strong margin. And obviously, the recovery of La Prairie will be very, very significantly helping us on the margin as well.

In terms of cost, what we're seeing is a very mixed picture. We're seeing some materials soften. But unfortunately, inflation also in terms of people costs in factories and our 3 PMs as well as energy cost, unfortunately, are at a high level and are impacting our input costs. So it's plateauing at the moment. At a high level, we're seeing the first half of the year, not really a reduction. We do hope to see a second half reduction. The 1 area where we're seeing some softening is on freight, which will obviously be very helpful in our gross margin picture in 2023.

Jens Geissler

Our last caller today is Rashad Kawan at Morgan Stanley.

Rashad Kawan

Just 1 on M&A, please. You talked about being active in M&A discussions. Can you remind us of your M&A focus and whether or not that's changed? Are you looking into more bolt-ons or tuck-in type deals? And maybe talk about specifically which areas you're focused on?

Vincent Warnery

Thanks, Rashad, for the question. We are clearly interested in everything which is connected to premium skin care. That's clearly the name of the game. This is where we want to build -- to increase to expand our portfolio. We are looking particularly at businesses which are strong in the U.S. because we believe that I think a strong foundation in the U.S. is the recipe for success. And this is exactly why we bought Chantecaille, it's ticking exactly both objectives. So we are looking at every -- each and every M&A opportunity in this field, which is currently on the market or should be in the market in the months to come.

Jens Geissler

Thank you, Rashad. Well, I don't see any further callers. So this concludes our Q&A session. And I would actually say thank you for having joined our analyst meeting today. We appreciate your interest in Beiersdorf. Thank you, and goodbye.

Vincent Warnery

Thank you so much.

Astrid Hermann

Thank you.