CEO Letter

Kasper Rorsted

Dear Friends of the Company,

2012 was a milestone year for Henkel: We achieved excellent financial results in a highly volatile and competitive market environment. We also delivered on the ambitious mid-term financial targets we set in 2008 for the period up to 2012. Over the past four years, we have substantially advanced Henkel in all the strategic dimensions we had defined: customer focus, achieving our full business potential and strengthening our global team.

We are now committed to moving the company forward with a clear strategy and new financial targets for the period up to 2016 – focused on our vision to become a global leader in brands and technologies.

Strong business performance in 2012

In 2012, the global business environment continued to be challenging: recession and austerity programs in many countries in Western and Southern Europe, slowing growth in China, unrest in the Middle East, and a slow recovery combined with persistently high unemployment in the United States of America continued to affect both consumer and industrial demand.

However, all three Henkel business sectors delivered strong performance with profitable growth and expansion of market shares in their relevant markets.

In 2012, Henkel Group revenue grew to 16,510 million euros, which represents organic sales growth of 3.8 percent compared to 2011. Adjusted1 EBIT rose 15.1 percent to 2,335 million euros, while our adjusted return on sales (EBIT) increased to 14.1 percent compared to 13.0 percent in 2011. Adjusted1 earnings per preferred share (EPS) grew by 17.8 percent to 3.70 euros.

Thanks to our strong business performance and a continuous focus on cost, we were able to substantially increase our cash flow from operating activities to 2,634 million euros and reduce our net debt to 85 million euros. At the end of 2008, following the acquisition of the National Starch businesses, our net debt amounted to around 4.3 billion euros.

At the Annual General Meeting on April 15, we will propose a dividend payout of 0.95 euros per preferred share. This is an increase of 18.8 percent compared to 0.80 euros in the previous year.

Delivering on our targets 2008–2012

2012 also marks the successful achievement of our four-year targets. In 2008, when we announced our financial targets for 2012, we had anticipated a more favorable business environment with an average annual global GDP growth of 3 to 4 percent. Instead, we had to counter the biggest financial and economic crisis of the past decades, reducing average annual GDP growth between 2008 and 2012 to around 1.8 percent.

Despite these challenges, we delivered on our commitments. We have met – and in some dimensions exceeded – the ambitious mid-term financial targets for the period 2008-2012. In detail, we achieved:

  • average organic sales growth of 3.3 percent, in line with our target range of 3 to 5 percent,
  • adjusted return on sales (EBIT margin) of 14.1 percent, slightly above our target of 14 percent,
  • average adjusted EPS growth of 14.0 percent compared to a target of more than 10 percent.

On behalf of the Management Board, I would like to thank all Henkel employees around the world for their contribution to the successful development of Henkel. Their commitment to our strategic priorities and financial targets as well as their ambition to strive for excellence in everything they do have been key to our success.

Strong foundation for future growth

Over the past four years, our company has increased its financial performance and regained a strong balance sheet by reducing debt and improving cash flow. We have also substantially strengthened Henkel’s competitiveness in many dimensions, establishing a strong foundation for our future growth.

Since 2008, Henkel has become a more globalized company: in 2012, we generated 86 percent of our total sales outside Germany. Emerging markets have become particularly important for our business performance. They accounted for 43 percent of our total sales in 2012 compared to 37 percent in 2008. This corresponds with the evolution of our workforce. In 2012, around 55 percent of Henkel employees worked in emerging markets compared to 51 percent in 2008.

Today, Henkel has stronger brands, higher innovation rates and higher market shares in almost all its relevant markets. We have consolidated the number of brands from more than 1,000 to under 400, while sales from our top ten brands represented 44 percent at the end of 2012 compared to 38 percent at the end of 2008. Our balanced portfolio with fewer but stronger brands drives business performance in several ways. We can focus our marketing as well as research and development (R&D) investments on these brands. Strong brands also generate higher margins and strengthen our position in competitive markets.

We have made significant progress in building a customer-centric organization and have become closer to our customers in both our consumer and industrial businesses. By establishing regular “top-to-top” exchanges with our largest customers at board level, we ensure our organization is fully aligned toward our customers’ expectations, demands and business development.

We are more efficient and flexible in reacting to changing market conditions and customer demand thanks to the standardization and simplification of our business processes on a global scale. The continuous expansion of our shared services has played an important role in driving these improvements. At the end of 2012, around 1,500 employees worked in our shared service centers.

We have developed a stronger and better global team – with clear focus on delivering excellent performance. In 2012, for the fourth consecutive year, we conducted our “Development Round Tables” to evaluate the performance and development potential of around 9,000 managers at Henkel in a globally aligned process. Combined with defining ambitious targets and a compensation system designed to reward outstanding performance, we have established a strong focus on performance in our global teams: a “winning culture.”

We are convinced that diverse teams deliver better results and offer competitive advantages, and we actively manage diversity at Henkel – in terms of nationality, gender and seniority. Globally, around 31 percent of our managers are women, a share which we have steadily improved over the past years, ranking Henkel among the top-performing companies listed in the DAX. We aim to further increase this share by 1 to 2 percentage points per year.

New growth strategy for 2016

In November 2012, we announced our new strategy for the period up to 2016: “We will outperform our competition as a globalized company with simplified operations and a highly inspired team!”

The foundation for our new strategy was a thorough analysis of the long-term market trends which will affect our businesses in the coming years.

First, the ongoing consolidation in our supplier and customer base as well as in our competitive environment highlights the need to grow our businesses. Size will be a critical success factor in the future.

Second, as we expect the shift of economic gravity from mature to emerging markets to continue, we need to expand our already strong footprint in these markets over the coming years.

Third, we anticipate a highly dynamic evolution of our markets. As a consequence, we need to continue simplifying our processes and aim for operational excellence across our entire organization.

We reviewed our three business sectors against these megatrends to determine how they are positioned in their respective markets. As a result, we identified considerable potential for accelerated growth and increased profitability for each of our businesses.

To capture this growth potential, we will increase our investments and raise capital expenditures to a total of around 2 billion euros between now and 2016, an increase of more than 40 percent compared to the four-year period leading up to 2012.

Ambitious targets and clear strategic priorities

We also defined new, ambitious financial targets for Henkel. By the end of 2016, we aim to achieve:

  • 20 billion euros total sales,
  • 10 billion euros emerging markets sales,
  • 10 percent compound annual growth rate (CAGR) in adjusted earnings per preferred share (EPS).

These targets are based on organic growth, including continuous portfolio optimization.

To focus everyone at Henkel on successfully implementing our strategy, we have defined four strategic priorities:
Outperform – Globalize – Simplify – Inspire.

Outperform our competition: we aim to leverage our full potential in categories by actively managing our portfolio, strengthening top brands, launching powerful innovations and focusing on customers and consumers.

In our core categories, we will invest in strengthening and expanding leading positions. In growth categories, investments will fuel disproportionate growth of existing and new segments. In value categories, investments will be tailored to maximize profit potential.

We will continue to focus on our strong brands. By 2016, we expect our top 10 brands to generate approximately 60 percent of total sales.

Globalize our company: in mature markets, we will leverage our strengths and generate profitable growth through increased brand investments and continued cost focus. By 2016, we aim to gain more top positions while increasing profitability. In emerging markets, we will expand our existing category positions and accelerate growth in countries where we already have a strong presence. In addition, we will selectively enter new countries. By 2016, we expect 12 out of Henkel’s top 20 countries to be emerging markets.

Simplify our operations: we will continuously improve our operational excellence by making our processes more standardized and more digital, driving cost-efficiency and reducing administration cost.

Inspire our people: our strategy cannot be successfully implemented without the support of a highly motivated global team. With this in mind, we are focusing on three areas in order to make our team even stronger – the training and development of our management worldwide, rewarding talent and performance, and further increasing the diversity of our workforce.

Long-term sustainability strategy

At the beginning of 2012, we announced our long-term sustainability strategy “Factor 3” which aims to triple our resource efficiency by 2030. To ensure continuous progress over that long time period, we also defined specific intermediate targets for five-year intervals.

In 2012, we were named sector leader in the Dow Jones Sustainability Index for the sixth consecutive year and achieved top positions in many other sustainability rankings.

Together, we will make Henkel stronger

In summary, 2012 was a milestone year for Henkel in many aspects. In addition to thanking all employees for their contribution to our success, I would like to extend the special thanks of the entire Management Board to our supervisory bodies. On behalf of Henkel, I thank you, our shareholders, for your continued trust and support. We also thank our customers throughout the world for the confidence they have shown in Henkel, in our brands and in our technologies.

We are committed to continuing our excellent performance and making Henkel an even stronger company.

Düsseldorf, January 28, 2013

Sincerely,

Kasper Rorsted
Chairman of the Management Board

“We have substantially strengthened Henkel’s competitiveness in many dimensions, establishing a strong foundation for our future
growth.”

Kasper Rorsted
Chairman of the Management Board

 +3.8 %

organic sales growth.

 14.1 %adjusted1 return
on sales.

+17.8 %adjusted1 earnings
per preferred share.

1

Adjusted for one-time charges/gains and restructuring charges.

 

 

43 %of our sales generated
in the emerging markets.

44 %of our sales generated
by our top 10 brands.

Around
31 %
of our managers
are women.

“Our strategy: We will outperform our competition as a globalized company with simplified operations and a highly inspired team!”

Factor 3