Henkel Annual Report 1994 - KU Leuven...Henkel Austria Group, Vienna Belgium/Netherlands Henkel Benelux Group, Brussels/Nieuwegein France Henkel France Group, Boulogne-Billancourt

Henkel Annual Report 1994

Contents

● Henkel Annual Report 1994 ❍ Contents ❍ Preface ❍ Financial Highlights ❍ Corporate Management of Henkel KGaA

■ Supervisory Board ■ Shareholders' Committee ■ Management Board

■ Personally Liable Managing Associates ■ Members

■ Operating Management ■ Management Group Affiliated Companies

❍ Report of the Supervisory Board ❍ Management Report

■ In good shape for the future ■ Sales marginally up on the previous year ■ Profits hit new record ■ Exports up, sales in Europe down slightly ■ Strong sales growth overseas ■ Steady investment budget ■ Research ■ Outlook ■ Dividend

❍ Financial Performance ■ Equity base strengthened

■ Segment reporting ■ Distribution of value added ■ Cash flow still strong

■ Healthy balance sheet structure ■ Fund-raising in capital markets ■ Henkel shares

❍ Research and Technology ■ Enhanced innovative strength ■ Innovation offensive to secure future markets ■ Faster implementation of market-related ideas ■ Eco-Leadership: Leading role demands further research ■ Innovation awards 1994: A tradition of progress ■ Research symposium: Innovation and ecology

❍ Employees

■ Substantial improvement in per capita productivity ■ Personnel costs down ■ High-performance workforce ■ Remuneration more performance-related ■ International cooperation ■ Improvements in working procedures ■ Further improvements in health and safety at work ■ A word of thanks to our employees

❍ Chemical Products ■ Seizing the opportunities of the world market ■ Oleochemicals/Care Chemicals ■ Organic Specialty Chemicals ■ Outlook ■ Launch pad in China

❍ Metal Chemicals ■ Good business progress worldwide ■ Reduction in environmental impact ■ Higher quality standards ■ Outlook

❍ Industrial Adhesives/Technical Consumer Products ■ Upward climb continues ■ Technical Consumer Products

■ Outlook ■ Industrial Adhesives

■ Outlook ❍ Cosmetics/Toiletries

■ Previous year's sales figure just held despite difficult market conditions ■ Domestic markets ■ Foreign markets ■ Outlook

❍ Detergents/Household Cleansers ■ Good performance under difficult market conditions ■ Domestic markets ■ Foreign markets ■ Household care markets ■ Outlook

❍ Industrial and Institutional Hygiene ■ Leading market position extended ■ Outlook

❍ Major Participations ■ Europe

■ Henkel-Ecolab Joint Venture Companies ■ Germany

■ Grünau Illertissen GmbH, Illertissen ■ Teroson GmbH, Heidelberg

■ Austria

■ Henkel Austria Group, Vienna ■ Belgium/Netherlands

■ Henkel Benelux Group, Brussels/Nieuwegein ■ France

■ Henkel France Group, Boulogne-Billancourt ■ Sidobre-Sinnova SA, Boussens-Saint Martory

■ Great Britain ■ Henkel Ltd., London

■ Italy ■ Henkel SpA, Milan

■ Spain ■ Henkel Ibérica SA, Barcelona

■ Sweden ■ Henkel Norden Group, Stockholm

■ Switzerland ■ Henkel & Cie AG, Pratteln

■ Turkey ■ Turyag A.S., Izmir ■ Türk Henkel A.S., Istanbul

■ Overseas ■ Brazil

■ Henkel SA Indústrias Químicas, São Paulo ■ Mexico

■ Henkel Mexicana SA de CV, Ecátepec de Morelos and Mexico, D.F.

■ South Africa ■ Henkel South Africa (Pty) Ltd., Alrode

■ USA ■ Henkel of America Inc., Gulph Mills/Pennsylvania

■ Asia/Pacific Region ■ Henkel Asia-Pacific Group, Hong Kong

❍ Major Participations in Associated Companies ■ GFC Gesellschaft für Chemiewerte mbH, Düsseldorf ■ The Clorox Company, Oakland/California, USA ■ Loctite Corporation, Hartford/Connecticut, USA ■ Ecolab Inc., St. Paul, Minnesota, USA

❍ Annual Financial Statements ■ Henkel Group Consolidated Balance Sheet

■ ASSETS ■ SHAREHOLDERS' EQUITY AND LIABILITIES

■ Henkel Group Consolidated Statement of Income ■ Henkel KGaA Balance Sheet

■ ASSETS ■ SHAREHOLDERS' EQUITY AND LIABILITIES

■ Henkel KGaA Statement of Income

❍ Changes in Fixed Assets ■ Henkel Group ■ Henkel KGaA

❍ Notes on Henkel Group and Henkel KGaA ■ Comments on the Financial Statements

■ General ■ Companies included in the consolidation ■ Consolidation principles ■ Currency translation ■ Preparation, valuation and audit of financial statements included in the

consolidation ■ Notes on the Balance Sheet

■ Fixed assets ■ (1) Intangible assets ■ (2) Tangible assets ■ (3) Financial assets

■ Current assets ■ (4) Inventories ■ (5) Receivables and other assets ■ (6) Marketable securities ■ (7) Liquid funds ■ (8) Deferred charges

■ Shareholders' equity ■ (9) Subscribed capital ■ (10) Capital reserves ■ (11) Revenue reserves ■ (12) Minority interests

■ Special items ■ (13) Participating certificates ■ (14) Capital funds of dormant partners ■ (15) Special accounts with reserve element

■ Provisions ■ (16) Provisions for pensions and similar obligations ■ (17) Other provisions

■ Liabilities ■ (18) Liabilities ■ (19) Deferred income

■ Contingent liabilities and other financial commitments ■ (20) Contingent liabilities ■ (21) Other financial commitments ■ (22) Financial derivatives

■ Notes on the Statement of Income ■ (23) Sales

■ Analysis by product sectors ■ Analysis by markets

■ (24) Cost of sales

■ (25) Selling and distribution costs ■ (26) Research and development costs ■ (27) Administrative expenses ■ (28) Other operating income ■ (29) Other operating charges ■ (30) Financial items ■ (31) Changes in special accounts with reserve element ■ (32) Extraordinary items ■ (33) Taxes on income ■ (34) Depreciation ■ (35) Cost of materials ■ (36) Payroll costs ■ (37) Number of employees by function* ■ (38) Total emoluments of members and former members of the

Supervisory Board, Shareholders' Committee and Management Board ■ (39) Recommendation for appropriation of the profit of Henkel KGaA

❍ Auditors' Report ❍ Major 1995 events to date

■ January 1995, Monaco ■ February 1995, Wiesbaden, Germany ■ February 1995, Düsseldorf ■ February 1995, Düsseldorf ■ March 1995, Düsseldorf ■ March 1995, Hanover ■ March 1995, Düsseldorf ■ April 1995, Düsseldorf

❍ Financial Terms ❍ Chemical-Technical Terms ❍ The Mission Statement of the Henkel Group ❍ Corporate principles

■ Corporate principle No. 1: ■ Corporate principle No. 2: ■ Corporate principle No. 3: ■ Corporate principle No. 4: ■ Corporate principle No. 5: ■ Corporate principle No. 6: ■ Corporate principle No. 7: ■ Corporate principle No. 8: ■ Corporate principle No. 9: ■ Corporate principle No. 10:

❍ Ten-Year Summary ■ Henkel Group ■ Henkel KGaA

❍ Further Information

Preface

Dear Shareholders,

1994 was a good year for Henkel. Pre-tax profits increased by 16 percent and net earnings of DM 464 million were the best yet. Three factors have contributed to the improvement in earnings compared with the previous year. Operating profit has increased, especially from chemical products and specialty chemicals such as adhesives, metal treatment systems and products for institutional cleaning and hygiene; the net result from financial items has improved; and finally we are now seeing the first beneficial effects on costs of the restructuring measures taken in 1993 and 1994.

In this last year we have again seen the risk reduction benefits of our broad-based product portfolio and wide geographical spread. Weak growth in European consumer goods markets was counterbalanced by the performance of our chemical products and specialty chemicals business and the exceptionally strong growth of the Henkel Group on the American continent and in the Asia/Pacific region.

Nonetheless we intend to continue to optimize our structures with undiminished vigour in the years ahead. Although the process of slimming down the workforce was just about completed on schedule by the year end, the objective of creating more scope for innovation and investment by improving our cost structure will continue to be an important part of our strategy. With this in mind we are concentrating in particular on continuing to eliminate complexities and simplify processes; we are going to reduce the number of our production centers and - not least as a result of these measures - will attain more favorable manufacturing costs. Most important of all, however, this will enable us to increase significantly the speed of action and response within the Company.

At the beginning of 1994 Henkel embarked upon a broad-based innovation offensive which is already showing the first signs of success in the marketplace. These results are encouraging us to continue further down the same course. The challenge we face for the years ahead is this: we must again expand more strongly to ensure sustained earnings growth. Both our willingness to carry out extensive restructuring and the increasing innovative strength of our Company provide a good basis for achieving this goal.

Last year Henkel introduced its ambitious new corporate guidelines. They include our new mission statement as well as ten guiding principles and define the basis upon which we intend to operate our business. All Henkel's management personnel are helping to establish these guidelines in our corporate consciousness by means of appropriate campaigns within their own organizations. We have taken the mission statement and principles as illustrations for our Annual Report so that you too, our shareholders, are aware of our newly formulated identity.

The world economy will continue to stabilize in 1995, but the revival in activity will mean that raw material and feedstock prices will rise rapidly. We expect only slight improvements in the European consumer goods markets.

Our foreign sales and earnings figures for 1995 may also be adversely affected on translation into DM by the continuing strength of the German mark against the US dollar and major European currencies.

The measures which we have introduced leave us in good shape to achieve further improvements in earnings over the next few years.

Albrecht WoesteChairman of the Supervisory Board andof the Shareholders' Committee

Hans-Dietrich WinkhausPresident and Chief Executive Officer

Financial Highlights

(figures in DM millions, unless stated otherwise)

Henkel Group 1994 1993

Total sales 14,069 13,867

Operating profit 794 791

Earnings before taxes on income 677 584

Net earnings 464 385

Cash flow 1,396 1,443

- as % of sales 9.9 10.4

Shareholder's equity1) 4,070 3,671

Capital expenditure 1,007 981

Research and development costs 369 402

Number of employees (annual average) 40,590 40,470

Henkel KGaA 1994 1993

Dividend per ordinary share (DM) 9.00 2) 7.00

Dividend per preferred share (DM) 11.00 2) 10.00

Total dividends 144.6 116.5

1) incl. participating certificates and capital funds of dormant partners2) proposed

Corporate Management of Henkel KGaA

Dr. Dr. h.c. Konrad HenkelHonorary Chairman of the Henkel Group

Supervisory Board

Albrecht WoesteChairmanOwner of R. Woeste Group

Gottfried Neuen

Vice ChairmanChairman of the Works Council of Henkel KGaA

Dr. Ulrich CartellieriMember of the Executive Board of Deutsche Bank AG

Ursula FairchildPhotographer

Johann-Christoph FreyInvestment Banker

Benedikt-Joachim Freiherr von HermanForester

Dr. Klaus Dieter LeisterMember of the Executive Board of Westdeutsche Landesbank Girozentrale

Hans MehnertMember of the Works Council of Henkel KGaA

Herbert PuderbachChairman of the Management Personnel Representatives of Henkel KGaA

Erich RuchGeneral Manager of the Düsseldorf administration of IG Chemie-Papier-Keramik

Jürgen SarrazinChairman of the Board of Managing Directors of Dresdner Bank AG

Kläre SpaasChairwoman of the Works Council of Thera Cosmetic GmbH

Hans VonderhagenMember of the Works Council of Henkel KGaA

Jürgen WalterMember of the Governing Board of IG Chemie-Papier-Keramik

Dieter WendelstadtChairman of the Supervisory Board of Colonia Konzern AG

Winfried ZanderVice Chairman of the Works Council of Henkel KGaA

Shareholders' Committee

(Preface, (38) Total emoluments of members and former members of the Supervisory Board,

Shareholders' Committee and Management Board, (39) Recommendation for appropriation of the profit of Henkel KGaA)

Albrecht WoesteChairmanOwner of R. Woeste Group

Christoph HenkelVice ChairmanBusiness Executive

Dr. Jürgen ManchotVice ChairmanChemist

Prof. Dr. Herbert GrünewaldHonorary Chairman of the Supervisory Board of Bayer AG (until June 6, 1994)

Walter HunekePrivate Investor

Helmut MaucherChairman and Delegate of the Board of Nestlé S.A.

Dr. Christa PlichtaPhysician

Dr. Wolfgang RöllerChairman of the Supervisory Board of Dresdner Bank AG

Prof. Dr. Dr. Helmut SihlerFormer President and Chief Executive Officer of Henkel KGaA

Management Board

Personally Liable Managing Associates

Dr. Hans-Dietrich WinkhausPresident and Chief Executive Officer

Dr. Hans-Günter Grünewald(until March 31, 1995)

Dr. Uwe Specht

Members

Dr. Jens Conrad

Guido De Keersmaecker

Dr. Jochen Krautter

Dr. Ulrich Lehner(effective April 1, 1995)

Dr. Klaus Morwind

Dr. Roland Schulz

Dr. Wilfried Umbach

Operating Management

Hans J.M. Boekkerink

Bruno Deschamps

Dr. Karl Grüter

Dr. Jochen Heidrich

Dr. Paul Hövelmann

Arno Jacobi

Dirk-Stephan Koedijk

Jörg Koppenhöfer

Dr. Ulrich Lehner(until March 31, 1995)

Dr. Jürgen Maaß

Dr. Michael Schulenburg

Jürgen Seidler

Dr. Lothar Steinebach(effective April 1, 1995)

Prof. Dr. Hans Verbeek

Knut Weinke

Management Group Affiliated Companies

Klaus BehrensBrazil

Pierre BrusselmansBelgium/Netherlands

Terry EdwardsGreat Britain

Denis Claude B. de GersignySouth Africa (effective March 1, 1994)

Jorge GuixáMexico

Thorsten HagenauSwitzerland

Dr. Alfred HoffDuisburg (until March 24, 1994)

Peter KlewsSouth Africa (until February 28, 1994)

Axel KneipJapan

André LesaicherreFrance

Alois LinderSpain (effective January 1, 1995)

Antonio MonerrisSpain (until December 31, 1994)

Jean-Pierre de MontalivetFrance

Dr. Veit Müller-HillebrandHong Kong

Dr. Can PakerTurkey

Ehrhart Schlüter

Henkel-Ecolab

Kaya SenerTurkey

Dr. Heinz-Gerd SmolkaIllertissen

Björn J:son-StampeSweden

Dr. Friedrich StaraAustria

Dr. Vincenzo VitelliItaly

Dr. Norbert WiemersHeidelberg (until December 31, 1994)

Dr. Harald P. WulffUSA

Report of the Supervisory Board

The Supervisory Board has received regular quarterly reports in writing from the Management Board about sales figures, earnings, capital expenditure, activities in the field of research and technology, and the numbers of employees, and has been kept informed about important business transactions.

At meetings of the Supervisory Board, attended by all members of the Supervisory Board and of the Management Board, the Management Board has reported in detail on the performance of the business and on earnings in the period under review, overall and by business sector, and has answered questions raised by the Supervisory Board. Budget projections have been presented in summary form. The Supervisory Board has also kept itself informed about the control systems in force over purchases of oils and fats and hedging arrangements for interest rate and foreign currency movements. The reports by the Management Board were always discussed in depth.

The annual financial statements of Henkel KGaA, the consolidated financial statements of the Group together with the management report, the recommendation for the appropriation of profit and the report by the auditors KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Düsseldorf, have been laid before the Supervisory Board.

The annual financial statements and the consolidated financial statements together with the management report for the year ended December 31, 1994, have been given an unqualified opinion by the auditors. The Supervisory Board has noted and approved the results of the auditors' examination.

The Supervisory Board has examined the annual financial statements, the management report, and the recommendation for the appropriation of profit. After concluding its own examination the Board has

found no grounds for objections. The Supervisory Board accordingly approves the annual financial statements and concurs with the recommendation for the appropriation of profit.

Düsseldorf, April 3, 1995

The Supervisory BoardAlbrecht WoesteChairman

Management Report

(Report of the Supervisory Board, Auditors' Report)

In good shape for the future

The world economy enjoyed a broad-based recovery in 1994. Western Europe made up a great deal of ground on the United States in terms of growth while the American economy also continued to expand. In Latin America the recovery speeded up a little. In central and eastern Europe, too, with the exception of Russia, progress on the economic front was good. Growth in Japan was still subdued, while in the other industrialized countries of Asia economic expansion continued apace.

The driving force behind the resurgent world economy was rising demand for industrial goods. Consumer demand, by contrast, made no contribution in western Europe owing to the continuing high level of unemployment and the extra financial burdens on private households.

Against the background of this disparate economic environment in Europe and overseas the performance of our businesses in the year under review was mixed. Chemical products, metal chemicals and adhesives made very good progress. Detergents and household cleansers, on the other hand, together with cosmetics and toiletries, suffered from the weak state of consumer demand throughout Europe and increased competition on prices. The situation was further aggravated by exchange rate movements.

Sales marginally up on the previous year

The value of sales rose by 1 percent in 1994 to DM 14.1 billion. Excluding the effect of exchange rate movements - especially in Spain, Italy, Turkey and Mexico - the increase would have been 3 percent.

All the growth came from companies abroad. Sales of the German companies remained at the previous year's level.

Profits hit new record

Group operating profits were slightly higher than in the previous year. Bank borrowings were reduced further with a consequent beneficial effect on the result from financial items. Extraordinary items included another DM 123 million for restructuring costs in 1994; this was DM 118 million less than the amount charged in the previous year. Extraordinary expenses were charged again this year in connection with plant rationalization in Europe and additional early retirement agreements at Henkel

KGaA.

With an effective tax rate of 31 percent, net earnings were 21 percent up at DM 464 million, resuming the upward trend of many years' standing prior to the two immediately preceding years when earnings were hit by recession, and now attaining a new record level.

Exports up, sales in Europe down slightly

Export sales rose by 8 percent while sales in Germany went down by 1 percent overall. Sales of brand-name products were down slightly. Specialty chemicals recorded increased sales.

In the rest of Europe, sales were 2 percent down. Chemical products and adhesives benefited from the upturn in economic activity, increasing sales by a substantial margin. Brand-name products - especially detergents and household cleansers -, on the other hand, had to cope with appreciable setbacks in sales, mainly because of difficult market conditions, declining markets, and the inroads made by discount stores in Italy and Spain with competitively priced own brands.

Our European business portfolio saw the following changes in 1994. Early in the year, with retrospective effect to the beginning of the year, the soda and caustic soda activities of Matthes & Weber GmbH, Duisburg, were sold to D. George Harris & Associates, New York, USA.

In Switzerland, with effect from January 1, 1994, Henkel & Cie AG, Pratteln, took over the consumer goods brands of F. Steinfels AG, Zürich, in household detergents, dishwashing products and cleansers.

In Italy, Henkel strengthened its position in plastics additives by acquiring the Synco S.R.L. company in Calenzano.

Henkel KGaA signed an agreement with Pelikan Holding AG of Zug, Switzerland, in October under the terms of which Henkel is to take over from Pelikan the production machinery and equipment for the "Bonding and Correcting - Paper, Office, School" activity, the relevant production processes, and the employees engaged on this production line. Production will be transferred in stages to Henkel KGaA's plant in Hanover. Combining production in this way will make the manufacturing process more cost-effective. Pelikan will continue to market the products as well under its own brand name.

In Greece, Henkel Hellas A.E., Athens, acquired the adhesives company Viafrel A.E., Athens, towards the end of the year. This substantially strengthens Henkel's position as a manufacturer of adhesives and gives it market leadership in industrial adhesives in Greece.

Both the Group's affiliated companies in Turkey - Türk Henkel A.S., Istanbul, and Turyag A.S., Izmir - became wholly-owned subsidiaries of Henkel KGaA at the end of the year. The shares held by Pamukbank and Yapi ve Kredi Bankasi were acquired for a total consideration of DM 100 million.

Strong sales growth overseas

Although subject to a very mixed performance between regions, our affiliated companies overseas achieved sales growth of 10 percent overall in 1994. Thanks to the continuing high level of activity in North America our businesses in the USA and Canada managed to increase sales by 9 percent in total. Oleochemicals and metal chemicals recorded exceptionally good growth rates.

Sales in Latin American markets just managed to match the previous year's level. Henkel Mexicana recorded a fall in sales owing to currency factors, while sales in Brazil were marginally higher.

Sales in Africa, Asia and Australia rose by 21 percent in total. Excluding the effect of acquisitions and disposals the increase was 10 percent. Most of the growth came from the companies under the umbrella of the management company Henkel Asia-Pacific Ltd.

In China, Henkel made significant progress in the year under review towards its objective of achieving good market penetration for its core businesses. Together with the Chinese partner, Siping Municipal Oils & Fats General Plant, Henkel has set up a joint venture called Siping Henkel Detergents and Cleaning Products Company Ltd., based in Siping, in the province of Jilin, in the north-east of the country.

In Guilin in the south-western part of China, another jointly-owned company has been set up in the detergents sector: Guilin Henkel Detergents and Cleaning Products Co. Ltd. In this case the partner is Guilin Synthetic Detergent Factory. The joint venture in Guilin, together with Siping and the company formed in Tianjin at the end of 1992, is Henkel's third investment in the detergent and cleaning products sector in the People's Republic of China.

In the chemical products sector, in partnership with Shanghai Surfactant Factory (SSF) and Shanghai Petrochemical Comp. Ltd. (SPC), Henkel set up a joint venture at the end of 1994 - Shanghai Henkel Oleochemicals Ltd. (SHO) - based in Shanghai. This joint venture is to manufacture and market oleochemical products for the production of detergents, household cleansers and toiletries as well as textile auxiliaries.

In Brazil, Henkel has acquired a 25 percent stake in the capital stock of Bombril S.A., São Paulo, for US$ 50 million. With a production output of 350,000 metric tons of detergents and cleansers and more than 3,000 employees, Bombril is an important company in the Brazilian detergents market. Henkel will take over management responsibility for Bombril and inject technological know-how and its experience in marketing detergents and household cleansers.

Henkel Group Sales by RegionRegion Customer location Company location

DM mill.Change

%Share

% DM mill.Change

%Share

%

Germany 4,037 - 1 29 4,954 + 1 35

Rest of Europe 6,625 - 1 47 6,092 - 2 43

North America 1,745 + 9 12 1,788 + 9 13

Latin America 547 + 4 4 423 - 1 3

Africa, Asia, Australia 1,115 + 16 8 812 + 21 6

14,069 + 1 100 14,069 + 1 100

Steady investment budget

Capital expenditure on tangible, intangible and financial assets amounted to DM 1,007 million in

1994. Additions to tangible assets totaled DM 783 million. Goodwill purchased in connection with company takeovers and increased shareholdings in associated companies accounted for DM 152 million.

At the parent plant in Düsseldorf-Holthausen a new production line for Persil Megaperls came on stream. Renovating and replacing old sulfonation plants by modern, low-emission facilities for manufacturing fatty alcohol sulfates was completed. Construction of the new plant for the production of alkyl polyglycosides (APG®) proceeded on schedule. The largest infrastructure project was the commissioning of the second section of a new central warehouse. The final construction phase of the residue processing center - an important environmental project - was completed.

In Genthin, where Henkel KGaA's only branch operation is based alongside Henkel Genthin GmbH, large parts of a new production facility for liquid detergents and cleansers were commissioned. Full production is scheduled for 1995.

In Nemours in France and Malgrat in Spain, production and filling capacity for liquid detergents and dishwashing products was expanded. A new high-bay storage system was brought into use in Montornés in Spain, enabling stocks of detergents to be consolidated and distribution improved. At the Fino Mornasco plant in Italy a new sulfonation plant was completed.

At Henkel Corporation in the USA improvements to esterification facilities in Cincinnati were completed. In Aurora near Chicago in the USA new manufacturing facilities for adhesives and sealants for the automotive industry were taken on stream. Factories for manufacturing liquid metal chemical products were commissioned in Calhoun in the United States and Ecátepec in Mexico.

Research

Expenditure on research and development by the Henkel Group was 8 percent down on the previous year at DM 369 million - equal to 2.6 percent of sales revenue. The downward trend reflects the success of the restructuring carried out in research and development. Notwithstanding the reduction in staff, our research and development activities increased efficiency by concentrating on core activities, streamlining project management, and adopting an even more market-driven approach. In addition to the expenditure on research and development a further DM 148 million was spent on technical services in the year under review.

Our research and development activities are described in the section of this report headed "Research and Technology".

Outlook

We expect the world economy to remain in good shape through 1995. The recovery will probably continue in western Europe and gain further momentum in Germany. The peak of the cycle may well have been reached in the United States.

Our chemicals and metal chemicals businesses will benefit from this trend, although rapidly rising feedstock prices are causing some concern. On the consumer goods side we do not yet see any real signs of improvement in western Europe.

Thanks to Henkel's well-balanced product portfolio and geographical spread, we are again confident of being able to counteract the effects of any negative factors in particular markets in 1995.

The comprehensive restructuring program initiated in 1993 has been largely completed on schedule in 1994 as far as slimming down the workforce is concerned. All other action programs to improve the cost structure, however, will continue to be relentlessly pursued. These include reducing working capital, eliminating complexities, simplifying processes and standardizing systems, reducing the number of production sites, and cutting production costs.

The objective is to sustain and strengthen our competitive capability. The room for maneuver being created on the cost side is required for product innovation and marketing investment. Market share can only be maintained and increased with the help of outstanding product ideas, superlative inventory planning and control systems for our trading partners, and cost-effective production technologies. We have laid the foundations for this and are doing everything we can to ensure a steady improvement in earnings over the next few years.

Dividend

The unappropriated profit of Henkel KGaA amounts to DM 145 million. Our recommendation to the Annual General Meeting will be for a dividend of DM 9.00 to be paid on the ordinary shares and a dividend of DM 11.00 on the preferred shares for each share of DM 50 par value held. Including the tax credit on the cash dividend paid, shareholders liable to tax at the full rate will receive a gross dividend of DM 12.86 on each ordinary share and DM 15.71 on each preferred share.

The Henkel family has again waived part of the dividend payable on the ordinary shares in accordance with the Company's statutes.

Henkel KGaA Dividend in DM1989 1990 1991 1992 1993 1994

per ordinary share 6.00 6.50 7.00 7.00 7.00 9.00 *

with tax credit 9.38 10.16 10.94 10.94 10.00 12.86

per preferred share 9.00 9.50 10.00 10.00 10.00 11.00 *

with tax credit 14.06 14.84 15.63 15.63 14.29 15.71

* recommendation

Financial Performance

Equity base strengthened

Segment reporting

Henkel Group Sales and Operating Profit by Field of ActivitySales* Operating profit*

DM mill.Change

%Share

% DM mill.Change

%Share

%

Chemical products 4,135 + 8 29 230 + 59 29

Specialty chemicals 4,337 + 3 31 304 + 26 38

Brand-name products 5,597 - 4 40 260 - 36 33

14,069 + 1 100 794 ± 0 100

* including secondary activities

We report by segment on the fields of activity which match the key strategic elements of our business: chemical products, specialty chemicals and brand-name products.

Sales of chemical products rose 8 percent to DM 4,135 million. Operating profits from this activity went up by 59 percent to a new record level of DM 230 million. This good performance was due to demand picking up in almost all markets of the world. The good capacity utilization factor had a beneficial effect on costs and, coupled with tight cost control and improvements to the product portfolio, made a significant contribution to the excellent increase in earnings.

Specialty chemicals - metal surface treatment products, adhesives, and products for institutional cleaning and maintenance - recorded 3 percent growth in sales to DM 4,337 million. Operating profits improved by 26 percent to DM 304 million. Sales of metal chemicals were strong, generating greatly increased income: sales overseas were significantly increased, while market penetration of the European automotive industry was much improved. Adhesives for industrial applications and technical consumer products also posted increases in sales and earnings. Foreign business recorded good growth, while in Germany sales of technical consumer products were down slightly with some products being taken out of the range. Products for institutional cleaning and maintenance recorded increased sales and earnings, notwithstanding declining trends in the market as a whole.

Sales of brand-name products - household detergents, dishwashing products and cleansers, and toiletries - fell by 4 percent to DM 5,597 million against the background of a difficult economic environment in Europe. Operating profits were 36 percent down at DM 260 million.

Sales of detergents in Germany were up to the previous year's level despite the overall market showing no growth in value at all. Sales abroad, however, were lower because of cheap brands increasing their share of the market, competitive pressures on prices and adverse exchange rate movements. Sales of toiletries were only marginally below the previous year's level in spite of similarly unfavorable market factors. Earnings from brand-name products were depressed by increased expenditure on development and marketing, coupled with price reductions, to safeguard market share.

Distribution of value added

Henkel Group Value Added Statement1994 1993

DM mill. % DM mill. %

Net sales/Other income 14,466 100.0 14,314 100.0

Cost of materials 5,893 40.7 5,636 39.4

Fixed asset depreciation 826 5.7 808 5.6

Other expenses 3,455 23.9 3,631 25.4

Value added 4,292 29.7 4,239 29.6

Paid to employees 3,310 77.1 3,327 78.6

Public sector 280 6.5 269 6.3

Providers of capital 238 5.6 258 6.1

Shareholders 145 3.4 116 2.7

Minority interests 70 1.6 74 1.7

Retained in the business 249 5.8 195 4.6

Value added - sales and other income less the cost of materials, depreciation and other expenses - went up by 1 percent to DM 4,292 million. By far the largest proportion of the value added - 77 percent - was paid to employees. 6 percent was retained in the business to safeguard growth and strengthen reserves. Taxes also accounted for 6 percent and another 6 percent went to providers of capital (in the form of interest); shareholders and minority interests received 5 percent.

Cash flow still strong

Compared with the previous year's figure, which was affected by heavy provisions for employees taking early retirement, cash flow was 3 percent down at DM 1,396 million, equal to almost 10 percent of sales. The capital expenditure budget on tangible and financial assets and the extra funding required for current assets were financed in full out of cash flow. External funding was reduced by DM 100 million; liquid funds and marketable securities increased by DM 47 million in total.

Healthy balance sheet structure

Henkel Group Funds Statement 1994 1993

Net earnings 464 385

Depreciation of fixed assets + 826 + 808

Disposals of fixed assets + 94 + 56

Increase in long-term provisions + 83 + 284

Equity income less dividends - 71 - 90

Cash flow 1,396 1,443

Dividends Henkel KGaA - 116 - 116

Dividends subsidiary companies (to other shareholders) - 26 - 10

Capital expenditure on intangible assets* - 146 - 70

Capital expenditure on tangible assets - 783 - 886

Capital expenditure on financial assets** - 78 - 25

Total capital expenditure - 1,007 - 981

Change in inventories - 169 + 76

Change in receivables and other assets + 69 - 90

Change current assets - 100 - 14

Balance from internal funding + 147 + 322

Increase in capital + 272 -

Other changes - shareholders' equity and special items - 8 - 7

Change in trade accounts payable and notes payable + 76 - 64

Change in other liabilities - 50 + 208

Change in employee bonds and bank loans and overdrafts - 390 - 319

External funding - 100 - 182

Change in liquid funds and marketable securities + 47 + 140

* additions, including goodwill from company takeovers

** excluding increase in equity valuation of shares in associated companies (equity income)

Henkel Group Balance Sheet StructureDec. 31, 1994 Dec. 31, 1993

Total assets (DM mill.) 10,487 10,376

as % of total assets:

Fixed assets 52.0 52.8

Inventories 17.6 16.2

Liquid funds and receivables 30.4 31.0

Shareholders' equity 38.8 35.4

Long-term borrowings 23.0 22.9

Short-term borrowings 38.2 41.7

The balance sheet ratios continue to be good. Total assets increased to DM 10,487 million. The proportions of fixed and current assets to total assets remained little changed over the year under review at 52 percent and 48 percent respectively.

Purchased goodwill amounting to DM 152 million acquired in 1994 has been capitalized in line with international practice and is being amortized against earnings in subsequent years.

The shareholders' equity (including capital funds of dormant partners and participating certificates) increased by DM 399 million during the year under review. The shareholders' equity of Henkel KGaA has been increased by DM 272 million as a result of the option rights attached to the convertible warrant bond 1987/1994 issued by Henkel Finance Europe N.V., Amsterdam, being exercised. The shareholders' equity of the Group has been reduced by DM 100 million by acquiring our partners' shares in the Group's Turkish companies, the value of minority interests having been reduced

accordingly. The equity ratio has improved to 38.8 percent. Shareholders' equity and long-term borrowings together cover total fixed assets plus 56 percent of inventories. Pension and other provisions have increased by DM 83 million to DM 3,417 million in connection with the extensive restructuring program and now account for 33 percent of total assets. The return on equity was 12.8 percent (1993: 11.6 percent) and the return on total assets 8.8 percent (1993: 8.3 percent).

Fund-raising in capital markets

The convertible warrant bond 1987/94 for DM 250 million issued by Henkel Finance Europe N.V., Amsterdam, was redeemable on October 7, 1994. 99.75 percent of the subscription rights to convert into preferred shares of Henkel KGaA were exercised, increasing the capital of Henkel KGaA accordingly.

The preferred shares acquired by exercising the subscription right rank for dividends from the beginning of the fiscal year during which the subscription right was exercised.

Henkel shares

Key Data on Henkel Shares in DM

1994 1993DVFA/SG earnings per share 33.50 32.00

Quoted share price at year end 565 620

High for the year 685 640

Low for the year 529 507

Calculated on the DVFA/SG basis - after allowing for the increase in the number of shares from 14.05 million to 14.60 million - earnings per share for 1994 were DM 33.50 (compared with DM 32.00 for 1993).

At the end of the year the shares were quoted at DM 565, after trading between a high of DM 685 and a low of DM 529 during the year.

Research and Technology

(Report of the Supervisory Board, Research)

Enhanced innovative strength

Our research and development activities in 1994 were subjected to a substantial review with realignment towards our strategic corporate goals under the headings "Innovation" and "Eco-Leadership". The structural improvements implemented in past years involving the establishment of a central research capability combined with decentralized development units have contributed greatly to extending Henkel's role as a major force on the technological and ecological fronts.

Innovation offensive to secure future markets

To secure corporate success it is necessary to find an effective balance between short-term and long-term development projects. Our research and development already have the capability to respond quickly and flexibly to sudden changes in the market. Equally indispensable, however, are the more long-term research projects geared towards securing the competitive edge and profitability of Henkel in the more distant future.

The significance of future-oriented work in past years is clearly illustrated by the example of our extrudate technology in detergent production. The market success of this innovation was preceded by three years of intensive research activity. This underscores the fact that a considerable portion of the added value created in-house is due to the innovative strength derived from our own applied research and development capability. And this commitment is to be further extended.

Henkel embarked upon an innovation offensive at the beginning of 1994 which focused on our research and development effort. This R&D drive is to concentrate on the further augmentation of our core products and activities within the framework of a coordinated strategy. Within the Research/Technology management sector, working groups comprising researchers, product developers and marketing experts have been formed to cover all the main disciplines and relevant operational tasks with the aim of reconciling and interrelating more effectively customer requirements, market research and scientific/technical know-how.

Faster implementation of market-related ideas

Under the auspices of our Central Research department, a pool of ideas arising from the ensuing influx of innovative suggestions was compiled within a very short time. These promising keys to future success were selected on the basis of their market suitability and technological feasibility using the appropriate profitability and risk analysis techniques. This enabled us to identify a number of both new, essentially long-term research projects, and more directly implementable proposals. These were immediately handed over to the operational divisions. Thanks to the effective project management built into the system, there should be no delay in their commercialization and market launch. Henkel thus has all the prerequisites for consolidating and expanding its innovative potential, both now and in the future.

Eco-Leadership: Leading role demands further research

"Henkel is the ecological leader in the chemical industry." This corporate principle is reflected in our expenditure of DM 383 million on environmental and consumer protection and on safety, in 1994. Of this figure, approx. 20 percent was spent exclusively on research and development activities. The environmental compatibility of products is an indispensable criterion and one which is fully incorporated in the overall approach to quality at Henkel.

This is particularly well illustrated by our development work on alkyl polyglycosides (APG®), which again constituted one of our main R&D activities in 1994. APG constitutes a unique class of particularly efficient non-ionic surfactants. It is exclusively manufactured from the renewable raw materials of plant oil and starch. Following usage, APG offers rapid and complete biodegradability in the environment. The particularly good dermatological compatibility of these surfactants is very much in evidence not only in detergents and household cleansers but also in cosmetics and toiletries.

Indeed, APG-containing products such as Pril Balsam, a hand dishwashing detergent for sensitive skin,

have also enjoyed market success beyond Germany's borders. Similarly, the product quality of the range of cleansers sold in Germany has been substantially improved through the adoption of APG-containing formulations. A recent development is Fa 2in1 Soap and Cream, the first bar soap to contain APG; thanks to the gentleness of its surfactants, this product is equally suitable both for normal and sensitive skin. As a result of intensive ongoing research into other fields of application, APG has also become a widely used surfactant in the portfolio marketed by our Chemical Products operation. Our research and development people are working hard to make the high application potential of APG also available to other product segments at Henkel.

Innovation awards 1994: A tradition of progress

Research and development scientists have always been concerned with the problem of combining the latest chemical, process and engineering technology to achieve maximum customer benefit and improved environmental compatibility. At Henkel, this approach has long been integral to our R&D activities. This year the Fritz Henkel Award for Innovation was conferred for the thirteenth time. This international award serves to reward employee teams who, through their innovation and performance, have made an exemplary contribution to our corporate success. This time around, four groups received this coveted award: the idea and the development of the dermatologically compatible hand dishwashing detergent Pril Balsam and the development of the new, simplified and environmentally compatible process for zinc phosphating were both recognized by the judges. The award was also given to a team at Henkel Corporation in the USA for the development of environmentally compatible transmission lubricants on the basis of renewable raw materials. And, finally, the award also went to a project team responsible for the introduction of a new enzymatic-chemical process for the manufacture of high-quality protein-based raw materials used in the manufacture of cosmetics.

The innovative strength of our Company is further exemplified by the fact that, in the year under review, we submitted more than 500 patent applications. Related to turnover, this figure puts Henkel right at the top of Germany's chemical industry.

Research symposium: Innovation and ecology

With its research symposium in 1994: "In view of tomorrow - Research and Innovation at Henkel", the Company opened up a new avenue towards more information and dialog with the public through the media. More than 50 journalists and experts from industry, science and politics joined in discussions relating to the objectives, methods and successes of modern industrial research, as related to and illustrated by recent Henkel innovations.

Employees

Substantial improvement in per capita productivity

Our personnel policies in 1994 focused on improving the competitive standing and efficiency of the Henkel Group. Our staffing levels in the USA and Asia/Pacific were further expanded in order to develop our activities in line with market demand. Strategic location decisions resulted in the closure and merger of production facilities in Europe. Improvements in our working procedures and process organization led to a further optimization in the cost structure throughout the Group. Our ongoing restructuring measures were effectively pursued during the year under review, and extended to all areas of the Company.

The total number of employees at the Group fell in 1994 by 573 to 39,907. The total workforce at our German companies fell by 1,327 employees as a result of a sweeping restructuring program and the sale of the soda and caustic soda business of Matthes & Weber. The restructuring program was conducted with the agreement of both the Works Councils and the employees concerned. By the end of 1994, the total number of employees at our German companies stood at 15,418.

Abroad, the number of employees grew, as per balance sheet date 754 higher at 24,489. This is a direct consequence of the expansion of our business activities in Asia/Pacific. Our joint venture, Tianjin Henkel Detergents, was consolidated for the first time, so adding 966 employees to the total.

The personnel structure in the major regions - North America, Europe and Asia/Pacific - underwent substantial changes between 1992 and 1994. A reduction of 3,236 employees in Europe compared with a workforce increase of 1,239 in Southeast Asia. The proportion of employees abroad thus grew during this period from 57.9 to 61.4 percent.

Personnel costs down

The restructuring measures have resulted in a substantial improvement in the cost structure of the Group. In spite of a general increase in remuneration levels, personnel expenditure in 1994 was reduced to DM 3,310 million. The percentage represented by personnel costs in relation to sales decreased from 24 to 23.5 percent. Per capita productivity underwent a further increase during the same period. The largest increase in per capita sales was recorded in Germany, where the improvement amounted to 9.8 percent.

High-performance workforce

In 1994 the Henkel Group was able to hire approx. 1,500 employees either as newcomers to the Company or as successful trainees and apprentices. Given the high level of technical competence of our staff - 60 percent have received technical training or possess a professional qualification, and 12 percent have a university degree or equivalent - we are well resourced to tackle the tasks of the future. Systematic further education and training activities continue to promote the development of our employees. In 1994, more than 10,000 participants attended our educational courses and seminars in Germany.

Innovation, creativity and initiative of our employees remain important factors for success. This is exemplified by the high level of participation in our suggestions scheme. Henkel KGaA alone was able to achieve savings of DM 5 million on the basis of improvement suggestions acted upon during the year under review. The employees involved received awards for their suggestions totaling DM 1 million.

Remuneration more performance-related

Our commitment toward a high level of qualification also means that we can - and indeed must - offer our employees challenging tasks which require a substantial degree of independence and individual responsibility. Consequently, our remuneration systems have been more closely aligned to performance and results. A graduated incentive scheme for rewarding the managerial staff of the Henkel Group has been further expanded. The level of the bonus payments is geared to the achievement of individual work targets, specific team targets and also the overall results achieved by

the Company.

International cooperation

(Organic Specialty Chemicals)

Our Strategic Business Units operate on a worldwide basis. As a result, they are in a position to ensure the successful implementation of product and marketing concepts on an international scale.

In the year under review, 46 international seminars held in 15 different countries were attended by 700 managers. Multi-cultural management was also the subject of our Management Study Seminar which was held last year for the fortieth time.

The multitude of internationally aligned management programs and workshops held last year served to promote a spirit of common corporate culture. As one of Germany's most internationally structured companies, we profit from the multiplicity of our subsidiaries at home and abroad and the ensuing innovation potential which these provide.

Changes in Employee NumbersDec. 31, 1994 Dec. 31, 1993

Germany 15,418 16,745

of which Henkel KGaA 10,133 10,860

Abroad 24,489 23,735

Total 39,907 40,480

Improvements in working procedures

Numerous different projects were implemented in all our business and managerial sectors with the aim of revamping our working procedures. Worthy of particular mention is the expansion of group and team work concepts at Teroson and in Genthin, building on the experience and results gained in previous years with similar models in France, Spain and the USA. As a result, new standards were set in terms of quality and productivity.

Re-engineering programs implemented in the USA, a comprehensive Total Quality Management system introduced within our Metal Chemicals business sector, and the widespread application of the Kaizen principle - continuous improvement processes in small steps - in our Industrial Adhesives division counted among the activities worthy of particular note in the year under review.

Further improvements in health and safety at work

Henkel was able to improve further on an already high standard of health and safety at work last year. In our European companies, the number of notifiable accidents per 1,000 employees was 7% down on the figure for 1993.

At Henkel KGaA, 1994 saw a further reduction in industrial incidents. The number of notifiable

accidents decreased by 12%. The incident rate related to 1,000 employees fell from 14.8 in 1993 to 13.9.

A word of thanks to our employees

Thanks to the high level of commitment, efficiency and goodwill shown by our employees, we again achieved good market results last year against a background of, in some areas, a difficult economic climate and low levels of business activity. We would therefore like to express our gratitude to all the employees of the Henkel Group for their dedication and hard work. Our gratitude also goes to the employee representative bodies for their constructive and loyal cooperation.

Chemical Products

(Preface, In good shape for the future, Exports up, sales in Europe down slightly, Strong sales growth overseas, Steady investment budget, Segment reporting, Eco-Leadership: Leading role demands further research, Seizing the opportunities of the world market, Launch pad in China, Metal Chemicals, Good business progress worldwide, Henkel Benelux Group, Brussels/Nieuwegein, Henkel Ltd., London, Henkel SpA, Milan, Henkel Ibérica SA, Barcelona, Henkel SA Indústrias Químicas, São Paulo, Ecolab Inc., St. Paul, Minnesota, USA, Analysis by product sectors)

Share of Group sales: 29%

Oleochemicals/Care Chemicals Product groups: Fatty acids; glycerine and fatty acid derivatives; fatty alcohols and their derivatives; products for the cosmetics, toiletries and pharmaceutical industries, for detergents and household cleansers; aroma chemicals/perfume compositions; food and feedstuff additives; natural-source vitamin E and beta carotene.

Organic Specialty Chemicals Product groups: Base materials and additives for plastics, paints and coatings; auxiliary products for textile, leather and paper production; specialty products for mining, oil drilling, and for lubricants, plant care products and the construction industry.

Inorganic Products: Water glass

Seizing the opportunities of the world market

The broad-based upswing in the chemical products market, the first signs of which became apparent toward the end of 1993, gained in momentum during the year under review. In Europe, business development accelerated to match that of the North America and Asia/Pacific regions. The loss in turnover resulting from the sale of the soda and caustic soda business of Matthes & Weber and also the closure of the feed fats business of Schmidt & Hagen were more than offset by improvements elsewhere.

The sweeping restructuring measures implemented in all the managerial sectors and product divisions were concluded and the remaining decisions regarding our European network of plant locations were finalized.

Our global business activities are now controlled by two divisions, namely Oleochemicals (including

Care Chemicals), and Organic Specialty Chemicals. Our international marketing activities and also our regional marketing effort were placed on a new footing. Various teams are now established at the center of our communications and decision-making structures, thus facilitating a more effective international flow of technical and market expertise, and greater efficiency in the local coordination of interests.

The successes enjoyed in reducing costs, combined with a substantial improvement in sales, have resulted in a positive jump in earnings as compared with 1993.

Oleochemicals/Care Chemicals

(Strong sales growth overseas, Chemical Products, Seizing the opportunities of the world market, Launch pad in China, Sidobre-Sinnova SA, Boussens-Saint Martory, Overseas)

We were able to achieve growth in all regions and in all our product groups in this segment. Thanks to brisk demand, we enjoyed good capacity utilization. Nevertheless, the competitive pressures remained high in a number of important areas of activity.

1994 saw a stabilization in our market share for oleochemical base materials. A market-aligned pricing policy led to improved plant workload. The Henkel Corporation in the USA consolidated its position in the fatty acids market with investment programs being implemented to expand capacity. Sales of fatty alcohols produced locally also expanded.

The Care Chemicals division was able to improve on its leading market position. Business was brisk in all regions with the exception of Latin America where our expectations have not yet been completely fulfilled. Our Skin Care product line was strategically expanded. Development work in relation to our surfactants concentrated on environmentally compatible and user-aligned specialties such as fatty alcohol sulfates in granulate form, and surfactants for high-concentrate household cleansers.

The market launch of our alkyl polyglycosides (APG) in Europe resulted in an excellent customer response with a high level of willingness to participate in a wide range of tests and sample purchases. New applications for APG were also developed. Among our aroma chemicals and perfume compositions, Ambroxan in particular continued to follow a steep upward curve of success.

Thanks to new business in Poland and Hungary, our food additives showed a substantial increase in sales. Demand for natural-source vitamin E was exceptional. We were also successful in the development of further raw material sources. Sales in natural beta carotene, another antioxidant to complement the vitamin E products in our portfolio, underwent a substantial increase.

Organic Specialty Chemicals

(Chemical Products, Seizing the opportunities of the world market, Henkel Ltd., London, Henkel SA Indústrias Químicas, São Paulo, Henkel Mexicana SA de CV, Ecátepec de Morelos and Mexico, D.F., Henkel of America Inc., Gulph Mills/Pennsylvania)

With the world economy emerging from its recession, all our product groups registered improvements in both sales volume and revenue. Tight cost control and improvements in our product range,

combined with good sales, led to higher earnings.

Despite heavy competition in Europe, we were able to develop new market segments for our plastic additives. Effective marketing also resulted in substantial successes in the USA. Our additives for paints and coatings profited from our now faster system of inter-regional transfer of knowledge, expertise and new products.

In spite of the translocation of major segments in the textile and fiber industry to Asia, our results in Europe and North America showed a further increase thanks to improvements in our product portfolio and effective cost-cutting measures. The still unsatisfactory share of the Asian market will improve once production has started in China.

A generally high level of demand for leather auxiliaries resulted in considerable market growth in southern Europe, the USA and Asia. International cooperation in this rather locally structured business segment continued to show good progress.

There was a revival in demand in the paper and cardboard industry in Europe - led by developments in Scandinavia - and this was duly reflected in our business results. We succeeded in expanding our position in the recycling and pulp production markets. In North America, the situation only began to improve towards the end of 1994, with overall results for the year remaining at a disappointing level.

Despite stiff competition, we were able to defend our leading position in the supply of products used in the extraction of pure copper from its ores. This market showed rapid growth. Our ecologically sound drilling fluids for petroleum production and oil field exploration have now also gained a foothold in markets outside Europe - even without the added impetus of environmental legislation.

Our synthetic lubricants, and particularly base stocks for metal working fluids, were successful in Europe, while in North America we were able to achieve dynamic growth in our transmission and axle lubricants business.

Outlook

Thanks to their global presence and an innovative product development capability, both divisions are well positioned for further growth. The weak dollar which dominates our overseas business, and rapidly rising raw material costs which have to be passed on to the market, give rise to some concern. Nevertheless, we are confident of continuing success.

Launch pad in China

Following lengthy negotiations, the agreements covering the first joint venture of our Chemical Products operation in China were signed on 8 December 1994. Henkel now holds 60 percent of the shares in Shanghai Henkel Oleochemicals (SHO), with our Chinese partners having a 40 percent interest. The Chinese partners of this joint venture include not only future customers but also the supplier of ethylene oxide, a key feedstock product for the first operational phase.

Shanghai Henkel Oleochemicals will operate from a new factory served by a complete, integral infrastructure. A plant for the manufacture of non-ionic surfactants (ethoxylates) has already proven its operating efficiency. And a modern sulfonation plant is already on order as part of a rapid expansion

program. Henkel will begin by supplying products to the cosmetics, detergent and household cleansers sectors, and also the textile industry, with future product groups to follow.

With the SHO in Shanghai, our trading company in Hong Kong and our manufacturing subsidiary in Taiwan, Chemical Products is now well represented in what is potentially the largest market of the future.

Metal Chemicals

(In good shape for the future, Strong sales growth overseas, Outlook, Segment reporting, Improvements in working procedures, Good business progress worldwide, Higher quality standards, Outlook, Henkel Benelux Group, Brussels/Nieuwegein, Henkel France Group, Boulogne-Billancourt, Henkel Ltd., London, Henkel SpA, Milan, Henkel Mexicana SA de CV, Ecátepec de Morelos and Mexico, D.F., Henkel of America Inc., Gulph Mills/Pennsylvania, Analysis by product sectors)

Share of Group sales: 5 %

Product groups: Chemical products and application systems for the surface treatment of metals and substitutes; lubricants; cleaning products; corrosion inhibitors; products for conversion processing and water treatment; engineering services; antifreeze agents and corrosion inhibitors for motor vehicle cooling systems; CFC substitutes for cleaning applications.

Good business progress worldwide

Metal Chemicals performed particularly well in 1994 with an increase in sales by 6 percent and a substantial improvement in earnings. One especially positive aspect is the fact that these improvements were spread among all regions of the world.

In Europe, overall sales stabilized. We were successful in winning additional market shares in certain key sectors. This applies in particular to the automotive industry. The "Value to the Customer Award" received from the Volkswagen Group underlines this positive trend. Our concept to offer not only a complete and comprehensive product portfolio but also the possibility of an integrated service package has become increasingly popular among our customers, as evidenced by new contracts already agreed for additional business in 1995. An efficiency drive was successfully completed in the year under review. This has led to a substantial improvement in profitability throughout Europe.

In North America we were able to expand our already strong market position. Our "Chemical Systems Management" package was successfully introduced at several customers from the automotive industry. Each package is tailored to the individual requirements of the customer concerned and comprises not only the chemical products but also on-site technical services. The range of applications extends from traditional pretreatment and maintenance products to wastewater treatment. Considerable growth was also achieved with our Autophoretic® products offering enhanced environmental compatibility for single-coat paint applications.

In Latin America, business again progressed extremely well last year, with particularly good results coming out of Argentina and Brazil.

New business in Australia and New Zealand led to a further growth in sales with our already high

market share being further extended.

In all nine countries of the Asia/Pacific region in which we are active, business continued to develop according to plan. We were able to expand our market position in Singapore, Malaysia and Indonesia, particularly in the can industry, in coil coating, in steel and general industries. Above-average growth in spite of an already strong market position in the aluminum and steel industries was achieved in Thailand and Taiwan. Against a difficult economic background, our business in Japan also progressed well, particularly as a result of increased use of products free of chlorinated hydrocarbons (CFC) in electronics and precision parts. With our two joint venture partners in Shanghai and Guangzhou, we were able to consolidate and further expand our activities in China.

Reduction in environmental impact

Our development work during the year under review was geared towards introducing innovative products and processes into the market as well as satisfying the specific requirements of our customers. In particular, we concentrated our efforts on optimizing metal surface treatment by reducing both costs and environmental impact.

Under this aspect, a major milestone was reached by the development of a zinc phosphating system with an internal accelerator.

Nickel- and nitrite-free phosphating processes have proven successful in the household appliance and components industries. The reduction and substitution of heavy metals with this process is increasingly successful.

Further progress was achieved in the phosphating of galvanized steel coil, thus facilitating the forming process and improving both rust protection and paint adhesion.

Higher quality standards

Within the framework of our production strategy, we have continued with our policy of creating low-cost regional production centers accompanied by a reduction in the number of manufacturing plants in Europe.

We continue to make good progress worldwide in the introduction of quality systems conforming to the DIN ISO 9000 series. In the USA, our Metal Chemicals operation was certified according to DIN ISO 9001; in Canada to ISO 9002. In addition, Kaizen programs were introduced and further advanced with appreciable success at various individual production centers throughout the world.

At the beginning of 1994, a new production facility for the USA in Calhoun, Georgia came on stream. With this factory now operational, we are able to meet the requirements of our customers in the growing market in the south-eastern region of the USA.

Outlook

With the introduction of a number of improvement programs around the world, Metal Chemicals was able to further strengthen its overall position during 1994 to such an extent that we expect both sales and profits to show further growth in 1995, despite expected price increases of raw materials and

continued stiff competition.

Industrial Adhesives/Technical Consumer Products

(Analysis by product sectors)


Technical Consumer Products Product groups: Wallpaper pastes; ceiling, wall covering and tile adhesives; home decoration products; sealants; polyurethane foam fillers; contact adhesives; wood glues; glue sticks; superglues; PVC piping adhesives; flooring adhesives; building chemicals; coatings; automotive after products.

Industrial Adhesives Product groups: Dispersion adhesives; dextrin- and casein-based adhesives; hotmelts; polyurethane adhesives and sealants; contact adhesives; anaerobic- and aerobic-curing acrylates; cyanoacrylates; polyamides; epoxide structure adhesives; flock adhesives; rubber-to-metal bonding agents; PVC and SMA plastisols; butyl/PIB, polysulfide, silicone and MS sealants; corrosion-protective waxes; cable sealing compounds.

Upward climb continues

Technical Consumer Products

(Segment reporting, Industrial Adhesives/Technical Consumer Products, Sidobre-Sinnova SA, Boussens-Saint Martory, Türk Henkel A.S., Istanbul, Overseas, Henkel Mexicana SA de CV, Ecátepec de Morelos and Mexico, D.F., Henkel Asia-Pacific Group, Hong Kong)

The worldwide sales achieved by our core business activities reflected a good level of overall performance, although there were regional differences. There was a gratifying increase in turnover abroad while at home in Germany there was a slight decrease in sales due to substantial streamlining of our product portfolio. At the end of 1993, we divested paint and coating products, wood preservatives and car care products with the aim of effectively strengthening our strategically important product groups. Market share in household adhesives, wallpaper pastes, flooring adhesives, and glue sticks was further expanded. Following extensive development work, we launched a new wall covering adhesive powder onto the market in the fall of 1994. The response from the painting and decorating trade was extremely positive.

Abroad in Europe a growth in sales and increased earnings were registered not only in the main markets of Britain, France and Benelux but also in the countries of central and south-eastern Europe. In Italy, both sales and profits underwent an above-average increase thanks to the Bostik business which was acquired at the end of 1993, the results of which have been included in the consolidated accounts for the first time this year.

Overseas, sales and earnings improvements were achieved both in Latin America and in Southeast Asia.

In our product development and application engineering activities, our ongoing R&D effort has long

been geared towards the substitution of solvent-containing products by aqueous, low-toxin systems. As a result of this permanent commitment, we are now able to offer various solvent-free products for a wide range of applications.

Business with the paper, office materials and stationery trade received a considerable boost with the takeover of the production facilities for adhesives and correction fluids from the Pelikan company.

Outlook

In 1995 we will be looking forward to further efficiency improvements as a result of the concentrated alignment of our marketing and sales activities towards our core customer groupings. The measures introduced will lead to an improvement of our work processes combined with a higher overall level of service.

Industrial Adhesives

(Exports up, sales in Europe down slightly, Improvements in working procedures, Industrial Adhesives/Technical Consumer Products, Outlook, Henkel Ltd., London, Henkel Ibérica SA, Barcelona, Türk Henkel A.S., Istanbul, Henkel SA Indústrias Químicas, São Paulo, Henkel Mexicana SA de CV, Ecátepec de Morelos and Mexico, D.F., Henkel South Africa (Pty) Ltd., Alrode, February 1995, Düsseldorf)

There was a considerable growth in our business with industrial adhesives with appreciable improvements in both volume sales and revenue.

With the process of concentration on our core business activities, we succeeded in substantially consolidating our market positions worldwide. Market conditions demand from us an increasing degree of internationalization combined with effective local presence. As a result of our response, we can already point to the successful expansion of our business in North America and the Asia/Pacific regions.

Our business in packaging adhesives was marked by a trend towards increasing specialization and adaptation to the requirements prevailing in the individual market segments.

In addition, we were able to introduce a number of innovations for important sectors which also promise considerable growth rates in the future. One example is our new packaging adhesive Euromelt Xtra. With these contact hotmelts, there is no longer any need to use silicone paper in applications involving nonwovens, labeling and packaging.

Our range of solvent-free Liofol film and foil laminating adhesives was further extended through the introduction of UV-curing systems (Liotron), the latest in this new line of environmentally compatible products.

The segment involving adhesives for the cable and electrical engineering industries was characterized by increasing competitive pressure.

Our business in adhesives for the shoe industry progressed according to plan and received a further boost from the substitution of solvent-containing systems by PU hotmelts.

Our reaction adhesives again showed good market performance.

In the General Industry/Insulating Glazing business unit at Teroson in Heidelberg, the revival in business continued following the successful integration of our engineering adhesives activities. Through the acquisition of the adhesives and sealants business of the Boston company in Italy, our market share in southern Europe was further increased.

There were positive developments in our activities involving adhesives and sealants for the automotive industry. Thanks to new business and an increase in our volume share, we were able to improve on both our sales and earnings figures. The forecasts for automobile production worldwide up to and beyond the year 2000 are encouraging, indicating that we can look forward to continuing growth over the next few years.

Our activities in relation to new technologies mainly involve vehicle glazing systems, multifunctional automotive sound-deadening products (TEROPHON) and underbody sealants (TEROCOAT). These innovative products, which are protected by worldwide patents, facilitate the manufacture of lighter, more comfortable cars and have already proven successful in production line tests. They are currently undergoing mass-production trials at selected manufacturers.

Our joint venture in China was very well received and has substantially strengthened our market position in Southeast Asia. By establishing this early foothold, we feel we are well placed to take full advantage of the market growth expected to occur in this region.

Outlook

The industrial adhesives markets offer excellent opportunities for further business growth in 1995. We also expect additional benefits to accrue from our targeted innovation management program. New adhesive technologies and new products for specialized applications are also to be launched onto the market.

Cosmetics/Toiletries



Product groups: Toilet soaps; bath and shower products; deodorants; skin creams; skin care products; dental care and oral hygiene products; hair shampoos and conditioners; hair colorants; hair styling and permanent wave products; perfumes and fragrances.

Previous year's sales figure just held despite difficult market conditions

The economic environment in 1994 meant that conditions for the European cosmetics market were difficult. The high level of underlying unemployment and decreasing real incomes resulted in a decline in expenditure on consumer goods. The trade is being increasingly concentrated within Europe, thus strengthening its purchasing power. Fast, price-cutting distribution chains are proliferating. The

resultant competitive pressure has demanded the allocation of high marketing budgets, expensive promotion campaigns and price reductions in order to secure and further expand our market positions.

Against this background, our cosmetics business was able to maintain its standing, with a slight upward trend becoming discernible in the fourth quarter of 1994. If it were not for the adverse foreign exchange influences which again prevailed in certain regions during 1994, a growth in sales of 2 percent would have been achieved.

Progress towards the geographical optimization of our European cosmetics production centers was further intensified: one factory was closed in 1994, and two further plants are scheduled for shutdown during the first half of 1995.

Domestic markets

In Germany the cosmetics market was characterized by stagnation, albeit at a high level of demand, with individual segments - soaps, deodorants and tooth care products - showing a decline.

Under the influence of market developments in general, and as a result of divestments and product streamlining, sales were down 3 percent on the previous year's level.

Our Fa line of brand-name toiletries, relaunched in 1993, has been further optimized: A high-quality soap based on the 2 in 1 concept - soap + cream - has now been launched onto the market; shower/bath products and soaps have been provided with a hydro-balance system to prevent skin dryness. All our deodorants feature a 24-hour deo-active system. Our successful City brand of cosmetics for men was extended with the incorporation of a new Eau de Toilette Concentrée.

Our Thera-med tooth care products were further developed with the incorporation of improved formulations.

Poly Kur, relaunched in the spring of last year, has been successfully repositioned in line with the trend towards products with natural active ingredients, this having now also spread to the hair care sector (shampoos, conditioners, rinses, treatments). The line was further expanded with the innovative Poly Kur Hydrokur, the first-ever transparent moisture treatment with seaweed extract.

As clear market leaders, our permanent wave products and hair colorants again performed well. The new line of colorants launched in 1993 under the name Poly Nature Color with its exclusively vegetable-based formulation has been well received and attained a substantial market share.

The improvement in sales was further supported by a comprehensive overhaul of several of our coloration product lines. Improved formulations, new and fashionable shade nuances and an updated image were developed for the lines Poly Color Mousse Sanft-Schaumtöner, Poly Color Soft Töner Intensiv-Tönungs-Lotion, Poly Color Brillance Intensiv-Color-Creme and Poly Diadem Pflege-Intensiv-Tönung.

The fashion styling brand Poly Swing was redesigned for the international market. The standard line was further complemented through the incorporation of the specialty styling products Silk-Look for straight hair, Curl-Look for curly hair and Short-Look for short hair.

Sales in our Aok skin care business increased by 4 percent. Our previous product lines Aktiv Pflege

and Aktiv Complex Plus were replaced by a new series of cosmetics - Aktiv Complex with Oxylastil. Oxylastil is an innovative natural-source active ingredient. It penetrates into the skin, increasing its oxygen absorption capacity and thus smoothing it.

The Aapri skin care line for young, uncomplicated skin was overhauled and provided with an internationally unified brand image. The moisturizing effect in the cleaning and care process is achieved by apricot-based active ingredients and the provitamin B-5.

Foreign markets

Our foreign business saw a growth in sales of 1 percent. Without the adverse effects of foreign exchange losses, this figure would have been 5 percent. The main markets were once again the major western European countries of France, Spain and Italy. Good progress was again achieved in the countries of south-eastern Europe. Business in Greece, Switzerland and Sweden also registered above-average growth. In Finland, the sales figures for the Poly line of hair cosmetics and the Vademecum oral care products, taken over from our previous distributor as from 1 January 1994, were added to the consolidated totals for the first time. Through Henkel Cosmetics China Ltd., headquartered in Hong Kong, an intensive campaign was launched with the aim of building up our own cosmetics business in China.

Comprehensive relaunch activities were also implemented by our foreign affiliated companies with brands and products being repositioned on the basis of improved formulations and image updates. The hair care brands Activ and Silkience were thoroughly overhauled. Activ, a significant anti-dandruff product marketed in nine European countries, has been provided with a major care component. Under the conceptual brand name Silkience Perfect Balance, a coordinated combination of care product, volume conditioner and protector matched to the individual hair type is now being marketed for the first time.

La Toja, the oldest toiletry brand in Spain - first marketed in 1904 - underwent a relaunch, and the line was further expanded through the inclusion of high-value care components. Neutromed in Italy is also being updated with a greater emphasis on care and gentleness to the skin.

Our international skin care line, Diadermine, was also launched in Britain, Hungary, Czechia, Slovakia and Slovenia. The range was further expanded through the inclusion of Fruitosome, the formulation of which contains fruit acids.

Outlook

Given the prevailing general market conditions, 1995 is likely to see no more than a small increase in demand for cosmetics, with competition remaining intensive. With the measures we have introduced on the marketing side and our production streamlining activities, we are confident that we will be able to increase sales and improve our earnings position in spite of the current difficulties.

Detergents/Household Cleansers



Product groups: Universal detergents; specialty detergents; fabric softeners; dishwashing products; household cleansers; scouring agents; floor and carpet care products; bath and toilet cleansers; glass cleaners and lens wipes; furniture and kitchen care products; shoe care and laundry conditioning products; plant care products.

Good performance under difficult market conditions

Domestic markets

Overall, Germany's markets for detergents and household cleansers stagnated in value terms during 1994. The growth in compact detergents and concentrates continued with the result that overall volume demand underwent a further decline. The importance of refill packs continued to grow.

Sales of our range of products and our position as market leader were both maintained, with results remaining high.

Our universal detergents business progressed particularly successfully. The share of the overall market enjoyed by our brands Persil, Weisser Riese and Spee was substantially increased. The launch of new products in the form of Persil supra and Persil color with their high-performance formulations, and particularly the introduction of Persil Megaperls onto the market in the middle of the year, provided a considerable boost to the Persil brand name.

Persil Megaperls is the first detergent in Germany to be produced by a new extrusion process in which the surfactants and active ingredients are compacted to an even greater degree than in the case of the so-called "compacts". Persil Megaperls have a particularly uniform product shape resembling that of small beads. According to the market data obtained so far, the launch of Persil Megaperls is the most successful experienced by Henkel's detergent business in recent decades.

Aside from Persil, developments in relation to Weisser Riese were also particularly gratifying. The market share of Spee in the new eastern states of Germany was also further increased.

There was a substantial decline in market demand for specialty detergents in 1994. This trend is primarily attributable to a shift from specialty color detergents to universal color detergents. The leading market position of Henkel was, however, maintained with a prevailing high level of sales, particularly in respect of Perwoll and Sil. The market shares of our brands fewa, dato, Wipp and Saptil underwent a slight decline. Progress in relation to our Vernel fabric softener was very encouraging, with sales and market share both increasing substantially.

Our dishwashing products Pril and Somat were able to expand their market positions in their respective segments in spite of the increasing pressure of competition. A decisive factor in this development was the introduction of innovative product ideas in the form of concentrates (Somat Supra and Somat Supra Tabs), and dishwashing detergents containing skin care ingredients (Pril Balsam).

In the household cleansers market we succeeded in maintaining our position as number two in the field, even though our competitors continued to invest heavily in this sector and substantially increased their advertising spend. The launch of Der General in the form of a bath-cleaning concentrate proved particularly successful.

Foreign markets

Our international detergents business continued to perform well in 1994 in spite of the difficult trading conditions which prevailed. With consumer demand dampened, the market for detergents and universal household cleansers in Europe outside Germany declined. This trend was exacerbated by the effects of stiff competition, volume and pricing policies and also foreign exchange fluctuations. Against this background, an overall decline in sales was unavoidable. While developments in Italy, Spain and Turkey were hampered by adverse structural changes, gratifying growth rates and gains in market share were achieved in Switzerland, Greece and Denmark. Our main brand, Persil, was able to improve further on its market share in Europe. Our national brands - X-tra and Super Croix in France, Weisser Riese in Germany, Austria and the Netherlands, and also Wipp in Spain - were able to maintain, and in certain cases even improve, their market position.

The most important objective in 1994 was to adapt our range to changing consumer requirements. The products were thus improved not only in terms of their performance but also in relation to their environmental compatibility and user convenience.

We were able to improve our competitiveness through further cost reductions, harmonization and standardization of our product lines, a geographical restructuring of our facilities in France and Switzerland, and further production optimization measures.

An important contributor to growth abroad was again our dishwasher detergents. Our concentrated Somat products (powder and tabs) were successfully launched in Austria and France. While the adverse consumer climate in Italy and Spain led to pressure being placed on the market share enjoyed by our top-of-the-range products, substantial increases in market share were achieved in Austria with the launch of new products. As a result of the burgeoning expansion of discount stores in Italy's retail sector, prices were subjected to considerable additional pressure.

In the household cleansers segment,

Documents

Henkel Annual Report 1994 - KU Leuven...Henkel Austria Group, Vienna Belgium/Netherlands Henkel Benelux Group, Brussels/Nieuwegein France Henkel France Group, Boulogne-Billancourt