Foreword

Photo: Kasper Rorsted, Chairman of the Management Board.
Kasper Rorsted
Chairman of the Management Board.
Liebe Freunde des Unternehmens,
12.3 % adjusted return on sales.

+ 7 % organic sales growth.
+ 47.6 % adjusted earnings per preferred share.

2010 was an excellent year for Henkel. For the first time in our corporate history, we concluded a financial year with an adjusted1) return on sales above 12 percent. Organic sales increased by 7 percent while adjusted1) earnings per preferred share rose by 47.6 percent. With these strong results, we are well on our way to achieving our financial targets for 2012.

We have further improved the market positions of all our business sectors relative to our competitors, have strengthened our top brands and have deepened our business relationships with our customers. We have been able to further expand our positions in the emerging markets, particularly in Asia and the Middle East. We have also initiated a comprehensive change process throughout the company aimed at further developing a “Winning Culture” at Henkel, aligned to a clear, long-term vision: A global leader in brands and technologies.

The outstanding results achieved in 2010 prove that we have made the right decisions in the past. Having adjusted to the decline in global economic growth at an early stage, we have emerged from the crisis stronger than ever. With our modified structures and improved processes, we have been able to benefit from the recovery of the global economy. It is evident that Henkel is well positioned to benefit from the process of globalization.

Growth in all sectors and regions

While growth in the US economy was slow, the emerging economies once again exhibited the highest rate of expansion. Following a substantial decline in the recession year of 2009, global industrial production again grew strongly in 2010. The recovery was particularly pronounced in Asia, especially in China, South Korea and Taiwan. Germany took a leading role among the industrialized nations, registering a double-digit growth rate in industrial output and taking the lead as Europe’s growth engine.

An analysis of the individual sectors shows that manufacturing – after substantial declines in the previous year – became a growth driver, with the automotive, metals and electronics industries all returning to growth. By contrast, growth in private consumption – having suffered only a comparatively minor decline in 2009 – was moderate.

In an improved yet, in some markets, still difficult environment, all our business sectors and regions were able to make major contributions to our business success. This was due not just to the general economic recovery but also, and particularly, to our continued strong focus on our strategic priorities:

  • Achieve our full business potential
  • Focus more on our customers
  • Strengthen our global team

Everyone at Henkel has made important contributions to our success in 2010. I would like, on behalf of the entire Management Board, to express our sincere thanks for their commitment and hard work!

Ongoing adaptation of our structures

The volatile business environment in recent years has shown how important it is to respond quickly, flexibly and decisively to changes. Even though the economic situation has stabilized in most markets, the necessity remains to continuously adapt and optimize existing structures so we can stay ahead of our international competition. In 2010, we were able to make further progress in a number of areas.

For example, we successfully concluded the integration process of the National Starch businesses, the largest acquisition in our corporate history. Through further improvements in purchasing, human resources and our supply chain, and through the expansion of our shared service centers in Bratislava (Slovakia) and Manila (Philippines), we have succeeded in simplifying our processes and further increasing efficiency. The ongoing optimization of our production sites around the world has also had a positive effect on our cost efficiency.

41 % of sales generated in the emerging markets.

A major factor for success is and will remain expansion in the emerging markets: once again, we were able to generate double-digit growth in 2010. We currently realize 41 percent of our total sales within these emerging economies, and 53 percent of our employees are now working in those markets.

Sales from top ten brands in %

Our strong brands are equally important for our business success. In 2010, we further strengthened our top brands and continued to optimize our brand portfolio. In the Laundry & Home Care business sector, we generate 81 percent2) of consolidated sales with our ten strongest brands, led by Persil. In Cosmetics/Toiletries, the contribution of the ten strongest brands is even higher at 89 percent. Of these, Schwarzkopf has developed into a mega-brand, accounting for annual sales of some 1.8 billion euros. In the Adhesive Technologies business sector, our top ten brands generate 52 percent of sales, with Loctite leading the way.

Our new and innovative products make a particularly important contribution to growth. In the branded consumer goods segments, we generate around 40 percent of our sales with products that have been in the market for less than three years. In the industrial business, where the development times for our customized technologies are significantly longer, the share of products that have been in the market for less than five years is around 24 percent.

Strengthening our corporate culture

Last year we initiated a process aimed at further developing our corporate culture. The internationality and diversity of Henkel require a strong, common culture – with a clear vision and shared values that provide orientation, guidance and identification for all our employees around the world. Our vision of being “a global leader in brands and technologies” defines a clear ambition for every Henkel employee. And in striving to achieve this goal, everyone at Henkel is guided in their daily activities by five values: customers, people, financial performance, sustainability and family.

Our employees have to understand these values in order to act upon them and make them the foundation of our future success. During the second half of 2010, every employee had the opportunity to actively familiarize themselves with our vision and our new values. Participating in around 5,000 workshops, they discussed how our vision and values can be effectively implemented within their working environment. In this report we explain how we live up to our values on a day-to-day basis (see chapter Vision and values).

We have also aligned our global system for employee assessment directly to our five values. By the end of 2010, the performance and development potential of around 9,000 managerial staff had been evaluated on the basis of these internationally standardized criteria. With this approach, we ensure that the decisions and the performance of our managers are fully aligned to our values.

Together, our vision and values define our credo as a company: “One Henkel.” In order to communicate and strengthen the Henkel brand both internally and externally, we are introducing a new claim in combination with a revised corporate identity. Our claim captures what we stand for:

Graphic: Henkel Excellence is our Passion

What do we expect for 2011? In order to achieve our full business potential, we intend to further optimize our portfolio by divesting marginal businesses and non-strategic local brands. In addition, continued focus on costs, adaptation of our structures in mature markets and further measures aimed at efficiency enhancement throughout the company will contribute to achieving our targets. Major elements in this process include the further expansion of our shared service center organization and increased utilization of standardized processes in all our business sectors and functions.

We want to further enhance our strong customer focus with targeted projects in all our business sectors. It is becoming increasingly important for many of our customers and consumers to understand how we integrate sustainability in our business activities. Henkel has already assumed a leading position in sustainability performance, as confirmed numerous times by external ratings. Based on this strong position, we will be further developing our long-term sustainability strategy in 2011.

We are introducing a new compensation system offering higher incentives for outperformance, and we will also increase our focus on talent development in 2011. We particularly want to increase the number of women in our management. By the end of 2010, the share of female managers had already climbed to around 29 percent.

Outlook for 2011

We expect further growth in the world economy in 2011. Following the substantial expansion in many of our customer industries, especially at the beginning of 2010, growth in the industrial sector is likely to normalize, with private consumption showing moderate growth.

All these factors, together with the expected increase in sales, will exert an upward influence on earnings development. Taking the prior-year results as our basis, we anticipate achieving an increase of around 13 percent in adjusted1) return on sales (EBIT), having generated 12.3 percent in 2010, and an increase in adjusted1) earnings per preferred share of around 10 percent.

Our Supervisory Board and Shareholders’ Committee also made an important contribution to Henkel’s business success in 2010. On behalf of the Management Board, I would like to take this opportunity to thank them for their strong support and advice throughout the year.

And on behalf of the entire company, I would also like to express our gratitude to our shareholders for their confidence and support. We are also grateful to our customers for their continuing trust in our company, our brands and our technologies.

Henkel is well positioned for the future. We have a solid financial base, hold strong positions in our international markets, and have highly motivated employees, successful brands and a strong presence in the growth regions. We intend to continue our transformation process in 2011 and to create a strong foundation for the future success of our company.

Düsseldorf, January 28, 2011

Kasper Rorsted
Chairman of the Management Board

1) Adjusted for one-time charges/gains and restructuring charges.
2)
Top brand clusters.