integrative case: henkel agcompetitive benchmarking of henkel ag valuation henkel ag vs. reckitt...

Integrative Case: Henkel AG Competitive Benchmarking of Henkel AG

ValuationHenkel AG vs. Reckitt Benckiser plc

Professor David Wessels ©2010

The Wharton School of the University of Pennsylvania

3620 Locust Walk, Philadelphia PA 19104


Presentation Overview

• Understanding a company’s past is essential to forecasting its future. For that

reason, we start with an in-depth analysis of historical operating performance.

• For Henkel AG, the company struggles to compete against its European

Household and Personal Care (HPC) counterparts, and specifically Reckitt

Benckiser plc. Henkel lags Reckitt Benckiser in each of the key value drivers:

organic revenue growth, operating margin, capital turnover, and financial

flexibility.

• Part of Henkel’s underperformance can be attributed to the economic

downturn and its reliance on Adhesives, which is highly cyclical. Yet even

controlling for segment performance, Henkel still remains well below best

practice. This presentation will examine each component in detail.

Valuation, Measuring and Managing the Value of Companies 2


Revenue Growth


• Between 2005 and 2009, Reckitt Benckiser has outgrown Henkel AG each and every

year. Reckitt Benckiser even managed to record 8.0% organic revenue growth during the

global recession of 2009, as compared to Henkel’s -3.5% growth.

• Henkel’s low organic growth is not caused by any particularly poor-performing segment.

Each division is growing at roughly the same rate.

2.1%

3.9%

4.0%

7.6%

Henkel AGIndustrialAdhesives

Henkel AGCosmetics/Toiletries

Henkel AGLaundry &Home Care

ReckittBenckiser plc

Organic Revenue GrowthCAGR, 2005-2009

6.0%

7.0%

7.0%

10.0%

8.0%

3.0%4.6%

5.8%3.0%

-3.5%

80

90

100

110

120

130

140

150

2004 2005 2006 2007 2008 2009

Organic Revenue GrowthYear over Year, 2005-2009

Reckitt Benckiser plc Henkel AG


Revenues by Geography

• For both Henkel and Reckitt

Benckiser, Europe and North

America generate the majority of

revenues.

• In 2005, developing markets made

up a larger portion of revenues for

Reckitt Benckiser relative to Henkel.

• By 2009, Henkel increased the

proportion of its business in

developing markets to 18.3%, nearly

matching Reckitt Benckiser’s 19.3%.


64% 62%

23% 19%

0%

20%

40%

60%

80%

100%

2005 2009

Henkel Revenue by Geography

Asia-Pacific

Latin America

North America

Europe/Africa/Middle East

18% 19%

31% 32%

51% 49%

0%

20%

40%

60%

80%

100%

2005 2009

Reckitt Benckiser Revenue by Segment

Developing Markets

North America & Australia

Europe


Operating Margins• Reckitt Benckiser has consistently generated a higher operating margin than Henkel, and

this difference has expanded over the last five years. The company’s higher margins are a

result of the company’s lower costs of sales, which is likely caused by higher prices from the

company’s premium products.


54.1%39.8%

33.8%

34.4%

9.3%24.2%

0%

25%

50%

75%

100%

Henkel AG Reckitt Benckiser

Henkel AG versus Reckitt Benckiser plcBreakdown of Revenue, 2009

Operating margin

Other expenses

Selling expenses

Cost of sales

10.2% 9.9% 10.7% 10.9% 10.3%

20.3%21.7%

22.8% 23.5%24.7%

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009

Henkel AG versus Reckitt Benckiser plcEBITA (% of revenues), 2005-2009

Henkel AG Reckitt Benckiser plc


Margins by Segment• Examining operating margins, and treating Reckitt Benckiser as a “pure play” relative to

Henkel’s individual segments, Reckitt Benckiser is more profitable each of Henkel’s

segments. Operating margins expanded (somewhat) for Henkel’s Cosmetics/Toiletries

and Laundry/Home Case businesses, but fell for the industrial adhesives business


11.4%

12.9%

10.6%

20.3%

Henkel AGLaundry &Home Care


Henkel AGIndustrial

Adhesives


Henkel AG versus Reckitt Benckiser plcOperating margin (EBITA), 2005

13.4%

14.3%

4.8%

24.7%

Henkel AGLaundry &

Home Care


Henkel AGIndustrialAdhesives


Henkel AG versus Reckitt Benckiser plcOperating margin (EBITA,) 2009


Industry Margins• Across the European household and personal care industry (European HPC), Reckitt

Benckiser is the clear leader in operating margins. Henkel ranks near the bottom within

the industry, and the company reports slightly lower operating margins than its domestic

competitor, Beiersdorf AG.


25.1%

17.6%15.3% 15.2%

11.0% 10.0%

6.9%5.4%

0%

5%

10%

15%

20%

25%

30%

Reckitt Benckiser

Givaudan Sa L'Oreal Sa Unilever Plc Beiersdorf Ag Henkel Ag And

Oriflame Cosmetics

Svenska Cellulosa Ab

European Household and Personal CareOperating margin (EBITA), 2009

Revenues 8,726.4 2,669.4 17,472.6 39,785.8 5,748.0 13,573.0 1,316.6 10,821.7(EUR)

Note: EBITA margin calculated using Worldscope data, unadjusted for in-depth analysis


Invested Capital Breakdown• As a percent of sales, Henkel and Reckitt have a very similar amount of operating

current assets, operating assets and invested capital.

• The primary difference in capital occurs because of PP&E, acquired intangibles, and

operating current liabilities. Henkel carries more PP&E and Reckitt Benckiser carries

more acquired intangibles.


26.3%

16.6%

60.5%

0.1%

103.5%

24.4%

0.1%

79.0%

0%

20%

40%

60%

80%

100%

120%

Operatingcurrentassets

Property,plant and

equipment

Goodwill &intangibles

Otherassets

Operatingassets

Operatingcurrent

liabilities

Otherliabilities

Investedcapital

Henkel AGPercent of sales, 2009

20.2%

8.2%

78.6%

0.3%

107.3%

35.6%

0.8%

71.0%

0%

20%

40%

60%

80%

100%

120%

Operatingcurrentassets

Property,plant and

equipment

Goodwill &intangibles

Otherassets

Operatingassets

Operatingcurrent

liabilities

Otherliabilities

Investedcapital

Reckitt Benckiser plcPercent of sales, 2009


• Henkel holds inventory and

accounts receivable in line with the

European HPC industry, but

underperforms Reckitt Benckiser

in both categories.

• In terms of inventory held, Reckitt

Benckiser is best practice, holding

on average 11.3 fewer inventory

days than Henkel.

• Reckitt also outperforms Henkel in

terms of its accounts receivable

collection period, 42.2 (for Reckitt)

versus 56.9 (for Henkel).

Inventory & Accounts Receivable



Financial Health: Debt to EBITA


• In addition to generating

industry best operating margins,

Reckitt Benckiser has

tremendous financial flexibility

(some would argue too much).

• AS part of the acquisition of

National Starch in 2008, Henkel

raised significant debt. As of

2009, the company would need

3.7 years of EBITA to pay down

debt.

0.2 0.4

1.6 2.0

2.9

3.7

4.8

8.0

0

2

4

6

8

10

Reckitt Benckiser

plc

Beiersdorf AG

L'Oreal SA

Unilever plc

Oriflame Cosmetics

Henkel AG

Givaudan SA

Svenska Cellulosa

AB

Deb

t-to

-EB

ITA

European Household & Personal CareDebt-to-EBITA, 2009

integrative case: henkel agcompetitive benchmarking of henkel ag valuation henkel ag vs. reckitt...

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