Financial Statements of Henkel Kgaa Earnings Per Preferred Share Rose from 3.65 Euros Are Summarized on Page 94

Henkel Group: Financial Highlights in million euros 2003 before 2004 before exceptional exceptional items1) items2) +/- 2003 2004 +/- Sales 9,436 10,592 12.3 % 9,436 10,592 12.3 % EBITA3) 835 1,000 19.6 % 831 2,362 > 100 % Return on sales (EBITA) % 8.8 9.4 0.6 pp 8.8 22.3 13.5 pp Operating profit (EBIT) 710 800 12.7 % 706 1,920 > 100 % Laundry & Home Care 287 300 4.7 % 287 300 4.7 % Cosmetics/Toiletries 194 225 16.2 % 194 225 16.2 % Consumer and Craftsmen Adhesives 141 150 6.1 % 141 150 6.1 % Henkel Technologies 194 235 21.5 % 194 235 21.5 % Return on sales (EBIT) % 7.5 7.5 0.0 pp 7.5 18.1 10.6 pp Net earnings 504 544 7.9 % 530 1,736 > 100 % Earnings after minority interests 493 543 10.1 % 519 1,735 > 100 % Earnings per preferred share before amortization of goodwill in euros 4.34 5.21 20.0 % 4.52 15.21 > 100 % Earnings per preferred share in euros 3.47 3.82 10.1 % 3.65 12.13 > 100 % Return on capital employed (ROCE) % 16.3 13.0 – 3.3 pp 16.2 30.9 14.7 pp Capital expenditures 321 344 7.2 % 321 344 7.2 % Research and development costs 257 272 5.8 % 257 272 5.8 % Number of employees (annual average) 48,328 49,947 3.4 % 48,328 49,947 3.4 % Dividend per ordinary share in euros 1.14 1.244) 8.1 % 1.14 1.244) 8.1 % Dividend per preferred share in euros 1.20 1.304) 8.3 % 1.20 1.304) 8.3 %

1) exceptional items 2003: sale of participation in Wella, Extended Restructuring measures, Clorox share buy-back pp = percentage points 2) exceptional items 2004: exchange of investment in Clorox, impairment losses on goodwill, Advanced Restructuring measures 3) operating profit before goodwill amortization 4) proposed

Contents

01 The Company 40 Laundry & Home Care 58 Changes in fixed assets 02 Preface 42 Cosmetics/Toiletries 62 Notes to the statement 06 Management Board 44 Consumer and Craftsmen of income 08 Henkel at a glance Adhesives 68 Notes to the balance sheet 10 Product portfolio 46 Henkel Technologies 92 Events after the 11 Highlights 2004 48 Risk management balance sheet date 13 Strategy 51 Outlook for the 93 Statement by the 17 Shares Henkel Group Management Board 21 Value-based management/ 51 Post-closure report 94 Appropriation of the profit Corporate governance 52 Consolidated financial of Henkel KGaA 25 Management report statements 95 Financial statements of 25 Underlying economic 52 Consolidated statement Henkel KGaA (summarized) conditions of income 96 Report of the 25 Business performance 53 Consolidated balance sheet Supervisory Board 33 Assets and 54 Statement of changes 97 Auditors’ report financial analysis in equity 98 Corporate management 35 Employees 55 Cash flow statement 104 Further information 35 Procurement 56 Notes to the 104 Financial highlights by quarter 36 Research and development financial statements 105 Ten-year summary 38 Sustainability 56 Segment information Credits/Calendar Three areas ofcompetence,fourbusinesssectors tion ofanopenfamilycompany. corporate socialresponsibility. We communicateopenlyandactively. We preserve the tradi- our people.We are committedtoshareholder value.We are dedicatedtosustainabilityand lence inquality. We striveforinnovation.We embracechange.We are successfulbecauseof We are customerdriven.We developsuperiorbrandsandtechnologies.We aspire toexcel- Values beautiful. that makepeople’s liveseasier, betterandmore Henkel isaleaderwithbrandsandtechnologies Vision Home Care Quality withBrands&Technologies Quality from Henkel. esnlCr Adhesives,Sealants& Personal Care osmrIndustry Consumer Surface Treatment Henkel Annual Report2004 1

The Company Preface

We are pleased to report that all our business sectors performed well once again in fiscal 2004, a year characterized by difficult underlying economic conditions in certain regions. The basis for this success, aside from the talent and commitment of our employees, was provided by strong market initiatives and strategically important acquisitions. The most important facts concerning our business development in 2004 read as follows: Total sales increased by 12.3 percent to 10.6 billion euros Organic sales grew 2.9 percent (after adjusting for foreign exchange and acquisitions/ divestments) Operating profit (EBIT) increased by 172.1 percent to 1,920 million euros; before exceptional items, EBIT rose 12.7 percent to 800 million euros Return on capital employed (ROCE) rose 14.7 points to 30.9 percent; before exceptional items, ROCE was 13.0 percent Earnings per preferred share amounted to 12.13 euros; before exceptional items, earnings per preferred share increased to 3.82 euros The Management Board, Shareholders’ Committee and Supervisory Board will propose to the Annual General Meeting a dividend payout of 1.30 euros per preferred share and 1.24 euros per ordinary share

The businesses operating in our three areas of competence – Home Care, Personal Care and Adhesives, Sealants & Surface Treatment – performed well, not only in Eastern Europe, Latin America and the USA but also in the Asia-Pacific region. While the consumer climate in Ger- many presented us with a number of challenges, we still succeeded through a series of initiatives implemented within our markets in consolidating and expanding our market shares. The 2004 financial year was primarily characterized by the expansion of our business in the USA and the strengthening of our strong positions in Europe and Asia. In the USA, the largest single market in the world, we undoubtedly took our most important steps to date in 2004. Through the acquisition of major US companies, namely The Dial Corporation and ARL (Advanced Research Laboratories), we have assumed a major position in the consumer goods market. As a result, we have now become one of the leading manufacturers of detergents and cosmetics, not only in Europe but also in the United States. Follow- ing the acquisition of the US adhesives companies Sovereign Specialty Chemicals and Orbseal, we have also substantially strengthened our Consumer and Craftsmen Adhesives and Henkel Technologies business sectors in the US, where both businesses now hold leading market positions. Finally, we exchanged our 29 percent stake in The Clorox Company for a composite package comprised of highly profitable product groups complementary to Henkel’s brands portfolio, plus the Clorox stake in Henkel Ibérica and cash. The cash received enabled us to significantly reduce the level of debt resulting from the acquisition of Dial. The result was an exchange of a significant financial participation for an operating business. When we combine

2 Henkel Annual Report 2004 our existing North American operations with the the Americanoperationsour existing with North and oftheSupervisoryBoard Chairman oftheShareholders’ Committee Dipl.-Ing. Albrecht Woeste yresponsiblemanner, Henkel whichisinthe tr ly duce employment levels but isregrettable market external ing conditions,again actingfrom apositionofstrength. Thedecisionto re- projects.Thepurposewillbetostructuring streamline to chang- ourstructures meetthe we have decidedto re- extend oursuccessful“Strong further with Future”program for the targeted acquisitions. additionalcarefullytend selected through to andeffectively accelerate further growth this scaleto provide internally agoodplatform for generatedsufficient further We growth. in- how companies fromthe acquired. ofadditionalknow- dependenceonindividualmarkets, benefit highermarginsandthe our our world America.Thesedevelopments salesfor 2005inNorth also meanareductionin aquired productgroups fromClorox,tions andthe we expectto generate aboutaquarter of lion eur employee representatives. Theprojects have beenallocated abudget ofaround400mil-priate Aware ongoingneedto ourcompetitiveness ofthe strengthen international arena, inthe regionhave Asia-Pacific In additionto America,ourbusinessesinthe now North assumed os, and we expectsavings ofaround125 millioneurosperyear beginningin unavoidable. Redundancies willbehandledinasocial- dto,andin adition, Dial, ARL,Sove Chairman oftheManagementBoard Prof. Dr. UlrichLehner agreement with the appro- the with agreement eg,andOrbseal reign, 2007. acquisi- Henkel Annual Report2004 Preface 3

The Company Preface

These measures are therefore part of our recently revised strategic financial plan in which we are aiming for an organic growth rate in sales of between 3 and 4 percent per year until 2008. This means that we want to grow faster than the market. We want to improve our return on sales (EBIT) to 12 percent and the return on capital employed (ROCE) to 16 percent. Earnings per preferred share are expected to increase by at least 10 percent year on year. A number of new appointments to the Management Board were announced in 2004, due to the impending departure of three members who have reached retirement age. The appointments of Dr. Friedrich Stara, Hans Van Bylen and Kasper Rorsted will foster the conti- nuity, internationality and successful growth policies that we seek. Incorporated in our strategy for success is Henkel’s commitment to pursue its goals on the basis of strict business ethics and a corporate governance concept that is as effective as it is responsible. For us, these are elements of a comprehensive set of principles. We fully subscribe to the concept of sustainable development and are a member of the UN Global Compact initiative. We take this responsibility seriously, a fact that we underscored in our response to the tragedy of the Asian Tsunami, the greatest natural catastrophe in liv- ing memory. As a company, we were very fortunate that our sites in the region were unaf- fected. Within the framework of our Corporate Citizenship initiative, we have provided our companies in the countries affected with around 1 million euros as immediate aid so that the local people can be given the assistance they need as quickly as possible. Looking at 2005, our plan is to extend our focus on organic growth, supported by strong market initiatives and attractive innovations from our research and development activities in both the consumer and industrial segments. Our restructuring projects will provide us with the increased cost efficiency we need for managing our organization flexibly and with a market-focused orientation. At the same time, we intend to utilize all the potential synergies available to us as we continue to integrate our acquisitions. Motivated and talented employees eager to learn are the key to our success. Consequently, in 2005 we will continue our investment in their development and training. Our people are proud of their company and are committed to it. Their knowledge and their experience are vital to Henkel’s position as a purveyor of quality and to ensuring that Henkel remains a vi- able and attractive investment going forward.

4 Henkel Annual Report 2004 qualities quality ofourpeopleandthe ofourbrands –worldwide andacrossallfrontiers. knowing we that canbuildonthe confidence, reason to to futurewith lookforward the bodies andcommittees for advice,guidanceandconstructive their criticism.We have every alsogoto corporate the Ourthanks shareholders, for your andconfidence. kindsupport We ouremployees thank loyalty for their andcommitment andwe aregrateful to you, our omte n fteofHenkel KGaA Prof.Dr. UlrichLehner Management Board ofthe Chairman Board Supervisory Committee andofthe Shareholders’ ofthe Chairman Dipl.-Ing. AlbrechtWoeste Sincerely yours, Henkel Annual Report2004 Preface 5

The Company Management Board

Prof. Dr. Ulrich Lehner 1) Dr. Lothar Steinebach Knut Weinke Chairman of the Executive Vice Executive Vice President Management Board President Finance Human Resources/ Born May 1, 1946 in Born January 25, 1948 in Logistics/Information Düsseldorf/Germany; with Wiesbaden/Germany; with Technologies Henkel since 1981 with an Henkel since 1980. Born February 16, 1943 in interim break of three years. Trier/Germany; with Henkel since 1969.

Quality Worldwide: Quality Worldwide: Quality Worldwide: “Although our focus in “An internationally recog- “We put our faith in the ca- 2004 was very much on nized, solid financial struc- pabilities and enthusiasm North America, the largest ture – confirmed by an of our employees. As dif- single market in the world, A-rating from major rating ferent as we are, our suc- we have not lost sight of agencies – provides us cess derives in no small our other markets else- with a firm basis for our part from our shared ob- where around the globe.” future development. With jectives and commonly held such a rating, we always values. We encourage em- have the possibility of fi- ployees to think and act nancing our businesses internationally by support- on the basis of good terms ing them with global man- and conditions from the agement standards. We international capital mar- also truly appreciate the kets.” opportunities that accrue from our wide variety of cultural perspectives.”

6 Henkel Annual Report 2004 1) isalsoexcellent.” China, sia, India,Mexicoand in countriessuchasRus- the potentialforgrowth our exceptionalqualities, to strengthen. Andwith market positionislikely cus onNorthAmer new fo- our With market. Laundry &HomeCare world numberthree inthe “We are currently the Quality Worldwide: Henkel since1969. Vienna/Austria; with June9,1943in Born Care dent Laundry&Home Executive Vice Presi- Dr. KlausMorwind Personally liablemanaging partner ica, our 1) Wal-Mart.” retail customerisnow now Dial;thelargest after Schwarzkopfis largest cosmetics brand in ourapproach: Our cus. Thismeansachange as amajorstrategicfo- has thusjoinedEurope tics market.TheUSA world’s largest cosme- portant stepintothe we havetakenanim- tions inNorthAmerica “Through ouracquisi- Quality Worldwide: Henkel since1969. Lörrach/Germany; with July21,1943in Born tics/Toiletries President Cosme- Executive Vice Prof. Dr. UweSpecht 1) launch innovations structures enableusto And ourinternational al marketfluctuations. dent oflocalandregion- makes usmore indepen- “Our globalpresence Quality Worldwide: Henkel since1979. Spittal/Austria; with August4,1947in Born Craftsmen Adhesives President Consumer& Executive Vice Alois Linder marketplace.” petitors operatinginthe compared withourcom- – asignificantadvantage right around theworld ly quick- worldwide!” brands. Nowthat’s quality established ternationally our saleswithtenin- we generatetwothirds of globally structured. And “Henkel Technologies is Quality Worldwide: Henkel since1973. Stuttgart/Germany; with October24,1942in Born Henkel Technologies Executive Vice President Dr. JochenKrautter Henkel Annual Report2004 Management Board 1) 7

The Company Henkel at a glance

Henkel at a glance

Global supplier of brands and technologies 129 years of brands success Three areas of competence: Home Care; Personal Care; Adhesives, Sealants & Surface Treatment Sales increase of 12.3 percent to 10,592 million euros; organic sales growth of 2.9 percent Operating profit (EBIT) 2004 before exceptional items: 800 million euros (up 12.7 percent)

The four business sectors of the Henkel Group

Laundry & Home Care Cosmetics/Toiletries Our product portfolio encompasses Our product range includes hair cos- heavy-duty detergents, special deter- metics, body care, skin care, oral care gents and household cleaners. and hair salon products. We are the number three world- We are in the top ten worldwide wide We are the number four in On the basis of our strengths in Europe Europe and North America, we are We are strengthening our pres- further extending our world mar- ence in the North American ket position, particularly in market Eastern Europe and Mexico

Consumer and Craftsmen Henkel Technologies Adhesives Our industrial and engineering ad- Our broad-based portfolio includes hesives, sealants and surface treat- home decoration products, adhesives ments provide system solutions of and correction products for the home worldwide repute. and office, and building adhesives. We are the world market leader We are the world market leader We offer tailor-made solutions de- Our growth is driven by innova- rived from our in-depth know- tions and acquisitions ledge of our customers’ processes We intend to further strengthen We are developing new applica- our positions, particularly out- tions and tapping the potential side Europe for growth in every region of the world

8 Henkel Annual Report 2004 2004 salesbyregion 2004 salesbybusinesssector in 125countriesonfivecontinents. Quality Worldwide Technologies Latin America Asia-Pacific Corporate Adhesives North America Consumer and Craftsmen Henkel 26 3 7 14 4 % % Corporate % % % 19 % 3 % Toiletries Cosmetics/ Care Laundry &Home Middle East Europe/Africa/ 34 – created by50,000employees 23 % % 67 % 1) 2004 EBITbyregion 1) 2004 EBITbybusinesssector excluding Corporate excluding Corporate Technologies Adhesives Asia-Pacific Latin America Consumer and North America Craftsmen Henkel 16 26 3 % % 1 % % 1) 15 % 1) Henkel Annual Report2004 Toiletries Cosmetics/ Henkel ataglance Middle East Europe/Africa/ Care Laundry &Home 33 25 % % 81 % 9

The Company Product portfolio

Product portfolio Laundry & Home Care

Heavy-duty detergents; special detergents; fabric softeners; laundry conditioning products; dishwashing products; household cleaners; scouring agents; floor and carpet care products; bath and toilet cleaners; glass cleaners; kitchen cleaners and special cleaning products No. 1 in Germany, No. 2 in Europe, No. 3 worldwide Dial brands: Purex, Renuzit, Armour

Cosmetics/Toiletries

Hair shampoos and conditioners; hair colorants; hair styling and permanent wave products; toilet soaps; bath and shower products; deodorants; skin creams; skin care products; dental care and oral care products; perfumes and fragrances; hair salon products No. 1 in Germany, No. 4 in Europe, No. 8 worldwide Dial brands: Dial, Coast, Tone, Pure & Natural

Consumer and Craftsmen Adhesives

Wallpaper pastes; ceiling, wall covering and tile adhesives; home decoration products; sealants; polyurethane foam fillers; cyanoacrylates; contact adhesives; wood glues; assembly adhesives; PVC pipe adhesives; flooring adhesives; building adhesives; coatings; roofing products; glue sticks; glue rollers; correction products; adhesive tapes No. 1 in Germany, No. 1 in Europe, No. 1 worldwide

Henkel Technologies

Bookbinding, labeling, wood, sanitary product, structural, packaging and laminating adhesives; reactive adhesives; high-performance sealants; polyurethane adhesives and elastomer sealants; cable insulating compounds; corrosion inhibitors; products and application systems for the chemical surface treatment of metals, PVC and polyacrylate plastisols; water treatment products; cleaning products; lubricants No. 1 in Germany, No. 1 in Europe, No. 1 worldwide

10 Henkel Annual Report 2004 July 1,2005. Toiletries sident Cosmetics/ Executive Vice Pre- Henkel since1984. Berchem/Belgium; with April26,1961in Born Hans Van Bylen March 2004 Acquisitions cleaner powder; BrefPower Pouches; Persil Color energy; WippPowder Weißer OXI Riesewith ShortWash formula; Persil Megaperls with New products Care Laundry &Home Highlights 2004 Appointed future membersoftheManagementBoard Group, Mexico Master Products The Masbusinessof USA Scottsdale, Arizona, The DialCorporation, effective Silk Flexline med Express-Weiss; Taft whitening cream; Denivit Intensiv tooth BodyPerfect;Diadermine got2b; Igora Vibrance; New products Cosmetics/Toiletries June 2004 March 2004 February 2004 Acquisitions Park, Illinois,USA Culver Inc.,Melrose business ofAlberto- The Indolacosmetics USA Scottsdale, Arizona, The DialCorporation, California, USA Costa Mesa, Laboratories (ARL), Advanced Research April 1,2005. Technologies Logistics/Information Human Resources/ Executive Vice President Henkel asfrom April2005. Aarhus/Denmark; with February24,1962in Born Kasper Rorsted Thera- effective New products Adhesives Craftsmen Consumer and December 2004 Acquisitions Power Prittgel Repair; Metylansecura; Loctite Superglue S.O.S. Chicago, Illinois,USA Chemicals Inc., Sovereign Specialty Henkel Annual Report2004 July 1,2005. Home Care sident Laundry& Executive Vice Pre- Henkel since1976. Amstetten/Austria; with March 3,1949in Born Dr. FriedrichStara December 2004 November 2004 Acquisitions products vent paste; P3cleaning Multicore lead-freesol- space industry; aero- products for the epoxy resinadhesive MicroEmission; Purmelt New products Henkel Technologies Chicago, Illinois,USA Chemicals Inc., Sovereign Specialty USA Richmond, Missouri, Orbseal LLC, Highlights 2004 effective 11

The Company Elaine Farmer, Tulsa, Oklahoma, USA: “My son loves his fluffy stars and stripes bath towel. That’s why I wash it – like all our laundry – with Purex. With Purex, my wash not only comes out clean but also smells fresh. It makes all of us feel comfortable.” positions, andweintendtofurtherexpandtheseonaglobalscale. Through ourfourbusinesssectorsoperatinginthesethree areas, wealready occupyleadingmarket The long-termstrategyoftheHenkelGroup istoconcentrateonitsthree areas ofcompetence: Strategy: Profitable growth worldwide sales there than is currently the case. the iscurrently than sales there futuretoin the realizealarger ofour proportion ket, we arealsokeeping Asiainoursights.We expect compared to 2003. Henkel America areexpected to riseto 25percentoftotal potential. above-average offers Europeandfurther ern growth ofWest- that than moreprofitable it issignificantly ica. Thismarket attractive isparticularly for usbe generate Amer- majority salesinNorth the oftheir situation haschanged considerably, operations asthese Sovereign Clorox andcertain operating businesses,this breakdown. acquisition Throughthe ofDial,ARL, America wasunder-represented inourGroupsales ashareofjust 2003,North 12With percentinfiscal need to achieve aregionalbalanceinourportfolio. be viewed. exchangeand the ofourClorox investment –should 2004–ourDial,ARLandSovereignfiscal acquisitions transactions of the that It isagainst background this Adhesives, Sealants&SurfaceTreatment Personal Care and Home Care Aside from the important Americanmar- Aside fromthe North to acquisitions,Thanks the salesfor 2005inNorth We aware areparticularly regard ofthe in this sales, thus approximatelysales, thus share doublingthe cause on an international scale – in keeping with the mottoon aninternational scale–inkeeping the with pected enhanceour organic to growth significantly ty alignedto needsofourtarget areex- groups the region. Asia-Pacific Europe andthe America,LatinEasternour salesinNorth double-digitpercentage increasesin 2004with fiscal underlinedin commitment to goalwasfurther this global presenceisessentialto securingourfuture.Our selectedcally andthrough acquisitions. Achieving a growingtors, organi- ouroperations profitably both our alreadystrong positionsinallfour businesssec- acquisition ofSovereign. extended the market through leadershipwasfurther respectiveone intheir segments worldwide. Andtheir Adhesives andHenkel Technologies number areboth wide. ened ourmarket segmentsworld- positioninboth ARL andIndolaacquisitions, we have now strength- Dial, spective aidofthe Europeanmarkets. the With metics/Toiletries re- occupy leadingpositionsintheir &HomeCareandCos- Our businesssectors Laundry Our innovative andhighlevels strength ofquali- We intend futureto inthe continueto improve Our businesssectors ConsumerandCraftsmen Henkel Annual Report2004 Strategy 13

The Company Strategy

“Quality Worldwide”. We shall focus on our strong provides us with critical mass in virtually every coun- brands and drive forward the internationalization of try, thus providing an important platform for our our brands portfolio in all our business sectors. How- business activities in each case. ever, the balance between strong international brands Special detergents, the most profitable market seg- and strong regional and local brands will continue to ment, and one in which the emphasis is currently be of strategic importance for us. very much on Europe, is particularly expected to ex- Our 2008 financial targets indicate our commit- pand in countries outside Europe and will improve ment to ongoing profitable growth. our profitability there over the medium term. The household cleaners segment has acquired the 2008 financial targets role of a growth engine due to the above-average rates of market increase and our readily expandable pres- Organic sales growth p.a. 3 – 4 % ence outside Europe. Aside from the classic household EBIT margin 2008 12 % cleaners, special cleaning products and dishwashing ROCE 2008 16 % detergents, we now also manage the air freshener busi- Growth in earnings per share p.a. ≥ 10 % ness acquired with Dial and the insecticide business obtained from Clorox within this segment. Laundry & Home Care strategy The Laundry & Home Care business sector intends to Cosmetics/Toiletries strategy continuously expand its global market position from The Cosmetics/Toiletries business sector is active in a leading position in Europe. Regional growth takes both the branded consumer goods and the hair salon the highest priority within this context, ahead of the businesses. Its portfolio encompasses products for development of additional product categories. hair cosmetics, body and skin care, and also oral care. Following the acquisitions of 2004, Henkel has be- A central element of our strategy here involves come the third largest supplier in the world market. driving the worldwide expansion of our activities Our entry in the North American market is of major with the regional focus on Europe, North America strategic significance for our global business. In addi- and Asia-Pacific. While the European business is to tion, the acquired know-how in the case of air freshen- be primarily expanded on an organic basis, our in- ers and insecticides will enable us to develop these at- tention in the other regions is to achieve further tractive product categories in further selected countries. growth through acquisitions. As part of this strate- Aside from growth generated through carefully gy, Henkel acquired the companies Dial and ARL in targeted acquisitions, organic expansion will again the USA in fiscal 2004, thus significantly improving take on major significance going forward. Our objec- our market position in North America. tive here is to grow faster than our competitors in the In the branded consumer goods segment, the em- respective national markets. This will provide us with phasis is on further globalization of our hair cosmet- economies of scale leading to increased efficiency in ics business under the Schwarzkopf umbrella brand. production, advertising and distribution, thus contin- The specific focus here will initially be on our hair uously improving our margins. colorants and then on our Gliss, Schauma and Taft The strategy with respect to our three market seg- brands. The body care segment will concentrate on ments is as follows: consolidating its market position in Europe and achiev- Heavy-duty detergents, the largest and most glo- ing rapid expansion of the Dial business in North bal market segment, is our base-load business. It America. The skin care business will continue to fo-

14 Henkel Annual Report 2004 tional segmentsinLatinAmerica. localmarkets, developingcessful inother thus addi- have Henkel productsthat with already proven suc- Festersupplementing the portfolio acquired inMexico regions.For example, inother wetial identified are additionalmarkettend exploitthe poten- to further future.Weimportant regionofthe growth likewise in- Eastern Europeearmarked expanded, with asan ther America. trades inNorth supplier to craft the men Adhesives businesssector hasbecomealeading sives andsealingcompounds, ConsumerandCrafts- the acquired assembly adhe- sult ofthe businesseswith acquisition ofSovereign shouldberegarded. Asare- context the this that low-on DIYbusiness.Itiswithin image transfer, isamajor factor fol- for successinthe new technologies effective know-how and,with and developed businessisasourceof markets, craft the tendscategory still to In berelatively insignificant. privatethe consumption this ofourproductswithin trades isaneffective craft approach as ness viathe men segment.Indeveloping markets, expandingbusi- expand. ther an internationally strong we brand that intend to fur- tute Pritt,we ourcorebusiness.With areableto offer hesives. and sealantsfor andbuildingad- DIYandcraftsmen; adhesivesadhesive tapesfor home,schoolandoffice; tor isactive market inthree segments:adhesives and AdhesivesThe ConsumerandCraftsmen businesssec- Consumer andCraftsmenAdhesivesstrategy step direction. inthis acquisition ofIndolain2004constituted afurther business internationally ofourstrategy. aspart The care segmentwilllikewise beconcentrating onEurope. Theoral Europeanroll-outofDiadermine. cus onthe Our buildingadhesives businessisalsoto befur- priorityisbeinggivenSpecial to crafts- growing the consti- home,schoolandoffice Products for the We alsointend expandourhairsalon to further nagement, andmarketing anddistribution. production andprocesstechnology, supply ofresearchand development, fields ticularly inthe formance inallouroperational functions,butpar- aresupported byagement above-average efforts per- active customers. Ourcustomer relationshipman- long-term loyalty the of,ourgloballyand earning platform for effectively necessary serving, vide the market segments. market positionsinallregionsandrelevant stepther closerto ourobjective ofachieving leading improve USAandbringusafur- ourstanding inthe of Sovereign ofwhichsignificantly andOrbseal,both carefully selected acquisitions. Henceouracquisition inAsiaandEasternparticularly Europe–andthrough kets organic regionalexpansion– growth, through Our aimisto salespotential exploitthe ofourmar- a complete range ofsolutions. with advanced technologies to provide itscustomers als andmetalsubstitutes. Henkel Technologies pools ofmet- cleaningandprotection surfaces the ofthe in industrial adhesive andsealant applications,and The Henkel Technologies businesssector specializes Henkel Technologies strategy Our market positionsandglobalpresencepro- Henkel Technologies world isthe leaderinitsfield. Henkel Annual Report2004 chain ma- Strategy 15

The Company Olga Ivanova, Moscow, Russia: “Outdoor photo- shoots can be tiring and you cannot always rely on the weather. For a flexible hold and a silky smooth shine for my hair, I use the new Silk-Flex hairspray from Drei Wetter Taft. The hold is just perfect and lasts the whole day, whatever the weather.” Shares: interest Increased international above closingpricefor 2003,ending2004at64.00 the shareprice toward year. inthe endofthe an upturn the measures,caused restructuring nouncement offurther was better expected market,an- than by the and mid August. quarter, third Performance inthe which Henkel’s sharepricedeclinedsubstantially.confirmed, forecast wasagain profit the be achievable. Although nally plannedorganic insaleswould growth nolonger its year beginningofMay. highof73.58eurosatthe acquisition the ofDial.Itreached openedupwith that initially positive wake prospects very inthe ofthe DAX rose7.3 percent. previous stock year German the whilethe index with Jones Industrial Average, gained 3.1percent compared year.ginning ofthe be- able to move above levels prevailed atthe the that were resultofayear-endonly asthe prices rally the that USdollarexchange oilpriceandthe in the rate. Itwas –duenotleast to developments fluctuations nificant ing stock exchanges provided amixed sig- picturewith slightly up.However, year lead- courseofthe the inthe Overall, international stock the 2004 markets finished Investor Relationswebsiteremodeled Henkel outperformsconsumergoodsindex Average preferred share tradingvolumeincreased Contacts withNorthAmericanandEuropean investorsextended In all, the Henkel preferredIn all,the sharerose3.2 percent The low year, for the 56.00euros,wasreachedin ofJuly, start At the Henkel origi- announcedthat HenkelPerformance preferred ofthe sharewas The most important stock AmericanDow index,the preferred and ordinary sharesby waypreferred andordinary ofstock owner- many. USA,investors Inthe areable to acquire Henkel regionalstock other exchanges and the this inGer- of change. Henkel isalsorepresented floor onthe Xetra electronicmarketFrankfurt Stock ofthe Ex- Henkel sharesareprimarily continuous traded onthe Henkel shares listedinmajorindexes have provided anannualyieldof7.1 percent. 8.5 percent.Over sameperiod,DAX the tracking w achieved anaverage annualyield(ignoringtax)of sharepurchaseswould,ther endof2004,have by the 1985, investors whore-invested dividendsinfur- their creased from8.7billioneurosto 9.1billioneuros. ous year: 322,000).Henkel’s market capitalization in- age turnover of348,000sharespertrading day (previ- creased compared to previous year anaver- the with market average. the outperformed thus cent. Both the ordinary indexroseonly slightly,this aplusof1.4 with per- sumer GoodsIndex.Compared to previous year, the of Henkel’sDow sharesisthe JonesEuroStoxx Con- ing to 60.89euros. share gained 4.5percent,increas- euros. Theordinary Since the issueofHenkel’s preferredSince the sharesin The trading volume ofHenkel preferred sharesin- performance A goodbenchmarkfor measuringthe and preferred sharesofHenkel Henkel Annual Report2004 Shares ould 17

The Company Shares

ship certificates obtained through the Sponsored Share data Level I ADR (American Depositary Receipt) program. Preferred Ordinary The number of such certificates issued slightly in- Security Code No. 604843 604840 creased once again over the previous year. ISIN Code DE0006048432 DE0006048408 The international significance of Henkel preferred Stock Exch. Symbol HEN3.ETR HEN.ETR shares is also indicated by their inclusion in major in- Number of Shares 59,387,625 86,598,625 dexes used as indicators for the capital markets and as benchmarks for fund managers. In Germany, Henkel are widely owned internationally. Most shares are as a DAX stock counts among the 30 most important held by German investors, followed by stockholders listed corporations in Germany. At the end of 2004, in the USA and the UK. The proportion of American the market capitalization of the preferred shares was investors has, moreover, increased compared with pre- 3.8 billion euros, putting Henkel at number 25 in the vious years. Around 2.5 million preferred shares have, DAX rankings with a weighting of 0.83 percent. in the past, been bought back by Henkel KGaA for its Henkel preferred shares are also included in other Stock Incentive Plan. Of the ordinary shares, members major international indexes. These include MSCI World, of the Henkel family own 51.5 percent, while the hold- Europe and Germany, the Dow Jones Stoxx 600 and ing at Jahr Vermögensverwaltung remains unchanged several sustainability indexes such as the Dow Jones at 6.1 percent. Sustainability and the FTSE4Good. Employee shares in high demand Shareholder structure increasingly global Since 2001, Henkel has been operating a worldwide Our preferred shares – the more liquid class of share – employee share program (ESP). In 2004, Henkel added

Key data on Henkel shares 2000 to 2004 in euros 2000 2001 2002 2003 2004 Earnings per share in accordance with IFRS Ordinary shares 3.20 3.452) 3.00 3.593) 12.074) Preferred shares 3.25 3.502) 3.06 3.653) 12.134) Share price at year end1) Ordinary shares 61.00 57.30 52.25 58.29 60.89 Preferred shares 69.30 63.50 60.55 62.00 64.00 High for the year Ordinary shares 66.90 68.47 69.69 60.90 68.00 Preferred shares 77.00 74.93 77.20 64.35 73.58 Low for the year Ordinary shares 43.90 56.04 50.60 43.88 52.51 Preferred shares 46.50 61.20 59.18 49.56 56.00 Dividends Ordinary shares 1.06 1.06 1.06 1.14 1.245) Preferred shares 1.12 1.12 1.12 1.20 1.305) Market capitalization in billion euros 9.4 8.7 8.1 8.7 9.1

1) Xetra closing prices 2) comparable after the sale of Cognis and Henkel Ecolab: ordinary share 3.00 euros and preferred share 3.05 euros 3) before exceptional items: ordinary share 3.41 euros and preferred share 3.47 euros 4) before exceptional items: ordinary share 3.76 euros and preferred share 3.82 euros 5) proposed

18 Henkel Annual Report 2004 2003 provided aplatform for expanding ourcommu- Henkelcan beobtainedfromthe management. forum atwhich comprehensivea further information conferences. TheAnnualGeneral Meetingconstitutes liveum for the broadcast oftelephone andanalysts’ panded in2004.Thiswebsite alsoserves medi- asthe www.ir.henkel.com, whichwasremodeledandex- constantly updatedthe Investor Relations website telephone or needthrough inquiry mation they around 430contactevents inall. headquartersings heldatourDüsseldorf –making telephone conferences andindividualmeet- merous Henkel’s top were management. Inaddition,there nu- possibilityoftalkingdirectly toprovided the with USA, institutional investors analysts were andfinancial 30 conferences androadshows heldinEuropeandthe analysts. Inover shareholdersandfinancial both with Henkel emphasis placesgreat onameaningfuldialog Capital marketcommunicationsrecognized years. sharesisthree these ferred sharesoutstanding. Thevesting periodfor ESP, the within oraround1.8 percentofHenkel’s pre- employ Henkel’s AsatDecember31, program. rolled inthis 2004, A total of9,270employees inaround50countriesen- ployees (limited to amaximumof4percentsalary). 33 centsto euroinvested every em- by participating Relative performance2004 100 110 120 80 90 The issueofalisted bondfor 1billioneurosin Private investors areableto infor- obtainallthe January ees heldatotal of1.1 millionshares in percent DJ Euro StoxxConsumerGoods Henkel preferred share Henkel ordinary share December DAX hr-em(ulo)A sal)P1 (negative) A2 (negative) Moody’s A2(stable) A–(stable) Standard &Poor’s Short-term (outlook) Long-term (outlook) Credit ratings Ratings developments within the Company.developments the within analysts regularly publishstudies relatingto current ticularly in Germany, USA.Over UKandthe 20 the Henkel iscovered analysts, par- by numerousfinancial Financial analysts term andP1 short-term. itsratings atA2long- A1 to A2,Moody’sconfirmed Henkel fromAto rating A–anditsshort-term from Standard &Poor’s reduceditslong-term rating for marketsing the ofitsacquisition ofSovereign. While changing itsstake inClorox, sametimeinform- atthe Arange.of maintainingitsratings inthe pendent rating agencies. Henkel goal hassetitselfthe isregularlyOur creditworthiness checked by inde- Ratings dates last report. page onthe ofthis Henkel best annualreports, tookthe secondplace. tion organized by Germany’s “manager magazin” for DAX placeinthe fourth category. competi- Andinthe magazineby “Capital”,for the example, Henkel took Investorrankings. Inthe Relations Awards conferred tions hasbeenrecognizedinvariousindependent Henkelsition andresultsofoperations Group. ofthe to facilitate assessmentofthe wements that use,andofcommonly appliedratios instru- financing cluding adetailedscheduleofthe information for bondinvestorscontains specific in- extended ourwebsite to includea“Bonds”ar have processwe ofthis lenders.Aspart nications with In October 2004,Henkel itwasex- announcedthat importantYou allthe ourcalendarwith willfind The quality ofourcapitalmarket communica- Henkel Annual Report2004 net assets, financial po- net assets,financial ea. This Shares 19

The Company Ricardo Martínez, Mexico City, Mexico: “In Mexico, we have a lot of fiestas. For these, we wear beautifully colored costumes and headdresses. I make my headdresses myself. For the next one I have made a mask, together with my mom – it’s real easy with my Pritt stick. My friends are gonna be so jealous!” The managementmaxims governance Value-based management/Corporate 1) related management compensation. Thisserves wide asacomponent incalculatingourperformance 12 percent).TheEVA® metricisalsoappliedworld- benchmarkliesat11tax, the percent(previous y WACC from8percentto 7percentfor 2004.Before cost ofdebtcapital,we have tax reduced ourafter cost ofequity anddebt.Becauseofadecreaseinthe market. Itiscalculated asaweighted average ofthe minimuminterestis the rate capital demandedby the cost ofcapital(WACC) appliedto capitalemployed the employed isonpage 88.Theweighted figure average calculation schemeusedfor capital determining the before (EBITA).The earnings goodwillamortization We measureouroperating using businessperformance Henkel, EVA® iscalculated asfollows: oncapitalrequiredturn capitalmarket. by At the exceeds cost ofcapital,i.e.itexceeds the re- profit the pany creates operating economicvalueaddedif the created by acompany inany period.Acom- reporting ric, we useEconomicValue Added (EVA®). Henkel Group.Asacentral internal management met- objectivesholder valueconstitute ofthe primary the andasustained growth increaseinshare- Profitable Strictly value-basedmanagement EVA Major priority attached to corporate governance principles Major priorityattachedtocorporategovernance 2008 financialtargetsdefined All businesssectorswithpositiveEVA Strictly value-basedmanagement EVA® economicvalueadded isameasureofthe ® is aregistered Stewart&Co. trademarkofStern EVA® =EBITA–(CapitalEmployed xWACC) ® 1) ear: All businesssectorsreport positiveEVA ROCE iscalculated atHenkel asfollows: average cost ofcapital,i.e.11 percentinourcase. ed capitalemployed onthe return the exceeds weight- the review. Acompany creates economicvalueaddedwhere oncapitalemployedreturn (ROCE) periodunder inthe tor derived EVA® fromthe average concept:the rate of size,we additionallyof varying indica- apply areturn long term aredivested asamatter ofpolicy. ing consistently negative valuecontributionsover the inall growth promote value-addingdecisionsandprofitable to the previous year.the Thiswasprimarily dueto ac- the wasafallinEVA® there operating profit, compared to increasein business sectors asignificant reporting Toiletries amounted to 63millioneuros.Despite both EVA® of91 ofCosmetics/ millioneuros,whilethat positivement wasinthe balanceofexceptional items. previous year.euros inthe improve- Thecauseofthis result of1,521 millioneuros,following 217 million HenkelIn 2004,the Groupachieved apositive EVA® In order to bebetter ableto compare businessunits The Laundry &HomeCarebusinesssector realized The Laundry All ourbusinesssectors reported positive EVA®. Value-based management/Corporategovernance ROCE =EBITA/CapitalEmployed our businesssectors. Businessesexhibit- Henkel Annual Report2004 ® 21

The Company Value-based management/Corporate governance

quisitions made in 2004. Because the synergies from and control aligned to a long-term increase in share- these acquisitions are not likely to accrue until a later holder value. Within this context, the Management date, this additional operating profit was outstripped Board, Supervisory Board and Shareholders’ Committee by the capital costs arising from the initial investment have committed themselves to the following maxims: outlay. The Consumer and Craftsmen Adhesives busi- Value creation as the foundation of our manage- ness sector saw its EVA® rise to 73 million euros. Henkel rial approach Technologies registered the strongest growth, report- Sustainability as a criterion for responsible man- ing a positive EVA® this time of 49 million euros. With agement its capital base decreasing slightly, the substantially Transparency underpinned by our active and higher operating profit significantly improved EVA® open information policy for this business sector. The return on capital employed (ROCE) grew ac- Henkel is a „Kommanditgesellschaft auf Aktien“ (KGaA), cordingly, rising from 16.2 percent in the previ- i.e. a partnership limited by shares and incorporated ous year to 30.9 percent due to the effect of the excep- under German law. This corporate form and our arti- tional items. While Henkel Technologies was able to cles of association give rise to certain differences with significantly increase its ROCE, the other business sec- respect to a stock corporation (AG) which we would tors had to accept a decline due to the acquisitions they like to explain in the following: made. Before exceptional items, the ROCE would have The duties of a board of directors at an AG are, at decreased to 13.0 percent. Henkel KGaA, incumbent upon the Management Board. This comprises the personally liable managing partners 2008 financial targets plus other duly appointed members. According to our The 2008 financial targets underline our endeavor to articles of association, aside from the statutory Super- continue to grow profitably. For more details, see visory Board, Henkel also has a standing Shareholders’ page 14. Committee. This latter is responsible for appointing the members of the Management Board, issuing the in- Corporate governance ternal rules of procedure guiding the actions of the Our compliance with the recognized principles of cor- Management Board and stipulating classes of business porate governance constitutes a further quality fea- transactions that require approval. It is also involved in ture of Henkel. For Henkel, good corporate gover- the management of the businesses. The Shareholders’ nance means responsible, transparent management Committee has recently appointed as future mem-

EVA® and ROCE by business sector in million euros Laundry & Cosmetics/ Consumer Henkel Home Care Toiletries Adhesives Technologies Corporate Group EBIT 300 225 150 235 1,010 1,920 Goodwill amortization 51 66 19 64 242 442 EBITA 351 291 169 299 1,252 2,362 Capital employed 2,364 2,072 876 2,266 63 7,641 Cost of capital (11 %) 260 228 96 249 7 840 EVA® 2004 91 63 73 49 1,245 1,521 EVA® 2003 188 107 66 – 17 – 127 217 ROCE 2004 (in %) 14.9 14.0 19.3 13.2 – 30.9 ROCE 2003 (in %) 33.1 22.6 20.7 11.3 – 16.2

22 Henkel Annual Report 2004 Value-based management/Corporate governance

bers of the Management Board Mr. Kasper Rorsted Essentially, Henkel also complies with the discretion- (Human Resources/Logistics/Information Technologies) ary provisions (“should/may” suggestions) of the code, effective April 1, 2005; Mr. Hans Van Bylen (Cosmetics/ with one exception regarding the long-term emolu- Toiletries) effective July 1, 2005; and Dr. Friedrich Stara ments component for the Shareholders’ Committee (Laundry & Home Care) also effective July 1, 2005. and the Supervisory Board. Against the background The Annual General Meeting of Henkel KGaA es- of recent legal rulings relating to share options, the sentially has the same rights as the shareholders’ meet- members of the Supervisory Board and Shareholders’ ing of a German stock corporation. In addition, it also Committee have waived their entitlement to value cre- votes on adoption of the annual financial statements ation rights. A new remuneration component aligned of the Company and the appointment and dismissal to the long-term success of the Company will instead The Company of members of the Shareholders’ Committee. be proposed to the 2005 Annual General Meeting for The Management Board agrees the strategic align- its approval. ment of the Company with the Shareholders’ Commit- In accordance with the Declaration of Compliance tee and discusses with it at regular intervals the status (www.ir.henkel.com), the following details are disclosed of its strategic planning and implementation schedules. in relation to notifiable shareholdings: The aggregate shares held by the members of the Supervisory Board German Corporate Governance Code and the Shareholders’ Committee exceed in both cases Notwithstanding the above-mentioned special aspects, more than one percent of the shares issued by the Com- Henkel KGaA complies with the recommendations pany. The aggregate shareholding of the members of (“shall” provisions) of the German Corporate Gover- the Management Board is less than one percent of the nance Code with two exceptions: shares issued by the Company. The remuneration of the members of the corpo- As disclosed in the notifications published in ac- rate bodies is disclosed as a total amount with a break- cordance with §15a WpHG (Securities Trading Law, down according to fixed salary, performance-related “Directors’ Dealings”), in fiscal 2004 the members of emoluments and components with a long-term in- the Management Board purchased a total of 2,778 pre- centive effect. Unless required by law, moreover, and ferred shares, and the members of the Supervisory in order to protect the legitimate interests and private Board/Shareholders’ Committee sold a total of 100,000 spheres of the members of the corporate bodies who preferred shares. are also members of the Henkel family, individual Further details can be found in the notifications shareholdings are not disclosed where they exceed posted on our website www.ir.henkel.com. 1 percent of the shares issued.

Management structure of Henkel KGaA Annual General Meeting 86,598,625 ordinary shares; 59,387,625 preferred shares (non-voting)

Elects shareholder representatives Elects members

Supervisory Board Shareholders’ Committee 16 members Up to 10 members: Human Resources Committee, Finance Committee

Appointment of Board members, Supervisory duties involvement in operating business

Management Board Personally liable managing partners plus other members

Henkel Annual Report 2004 23 Jennifer Liang, LC display development engineer, China: “The decision in favor of Henkel as a partner was not solely due to the quality of its P3 products. Its process know-how and service capabilities also provide an excellent basis for cooperation. And Henkel’s commitment to environmentally com- patible products reduces our disposal and waste- water treatment costs.” 1) exertedkets. demandthus Export amajor influence moderate Europeanautomotive inthe growth mar- increased by approx. 3percentdespite nomorethan around 4percent.InWestern Europe,production ous year, automobile manufacturingincreasedby consumer sector. Following previ- stagnation inthe expansion inconsumerspending. USAandChina,however,as the wasafurther there development. moredynamiceconomiessuch Inthe tion levels similarly trailed behindmacro-economic world,ly ofthe stagnated. consump- parts Inother 1.5percent. InGermany, consumerspendingactual- year aplusofjustZone, endingthe approx. with Private consumption Euro remainedsluggishinthe Developments bysector increase,growing at5percent. able anotice- economicoutputunderwent doldrums, the in LatinAmericawhere,following several years in a plusofalmost 3percent.Therewasaturnaround of 9percent.Japanproducedapositive surprisewith omy continuedunabated, generating rate a growth Chineseecon- of5percent.Thedynamismthe rate ly Asia achieved burdened exports. atotal growth euroincreasing- appreciationofthe The significant year. halfofthe weakity particularly first duringthe moderate domestic businessactiv- at2percentwith ed 4percent.Bycomparison, inEuropewas growth in 2004.Therate USAexceed- ofGDPincreaseinthe The world economy 3.5percent by grew morethan World economy Underlying economicconditions Management report forfiscal2004 before exceptional items Sales: up12.3percent to10,592millioneuros; organicsalesgrowth: 2.9percent Earnings perpreferredEarnings share Advanced Restructuringmeasures initiated Operating profit (EBIT) The industrial sector better the performed than 1) : up12.7percent to800millioneuros 1) : up10.1percent to3.82euros business sectors frompage 40onward. ofthe reports vidual segmentscanbefound inthe expansion. ing significant investmentsferent, with undergo- inconstruction USA andmany ofAsiawas,however, parts quite dif- inthe buildingindustry decline. Thepicturefor the continuedto construction was anincrease.German Western Europestagnated, inEastern Europe there were mixed.try investment Whileconstruction in Americaleavingfrom North itsmark. relocationofproductioncapacity market, the with year.of the numberonegrowth Here,Asiawasthe half first considerable inthe increase,particularly rises inproductionAsiaandLatinAmerica. was slightly below prioryear. Therewere substantial on activity. USA,automobile Inthe manufacturing At constantexchangerates Foreign exchange Change versusprevious year Sales development previous for year.above the figure the Theriseis 10,592 millioneuros,anincreaseof12.3 percent Fiscal 2004 Sales andprofits Business performance of whichorganic More detailedinformation relatingto indi- the Developments Europeanbuildingindus- inthe a underwent electronics industry Output inthe acquisitions/divestments sales at the Henkelat the Groupamounted to Henkel Annual Report2004 Management report 3.7% – 16.0 % 12.3 % 13.1 % 2.9 % 2004 25

Management report Management report

Sales1) in million euros 2004 sales by region in million euros

10,592 6,938 7,085 9,410 9,656 9,436 8,975 2,000

1,133

698 775 471 370 297 261

2000 2001 2002 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 1) continuing operations Europe/Africa/ North Latin Asia- Corporate Middle East America America Pacific 2004 sales by business sector in million euros turned in a highly gratifying performance. Henkel 3,617 Technologies registered an increase of 4.7 percent. 3,074 2,791 2,666 There was a decline in sales within the Corporate seg- 2,477 2,086 ment due to the expiry of contracts e.g. for infrastruc-

1,446 ture and allied services provided at the Düsseldorf 1,313 site by Henkel to Cognis, the former chemicals busi-

297 261 ness sold off in November 2001.

2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 In the regional breakdown, Europe/Africa/Mid- Laundry & Cosmetics/ Consumer and Henkel Corporate dle East exhibited a small growth in sales of 2.1 per- Home Care Toiletries Craftsmen Technologies Adhesives cent to 7,085 million euros, to which the business sectors all contributed apart from Laundry & Home predominantly due to consolidation of the sales gen- Care. Growth after adjusting for foreign exchange erated by Dial. In all, acquisitions and divestments amounted to 3.1 percent. In Germany, however, sales contributed 13.1 percentage points to this growth remained below prior year due to the persistent lack figure. The US dollar continued to decline in value of consumer demand. Only Henkel Technologies was in 2004 compared with the euro. Foreign exchange able to increase sales within the German market. rates had an overall negative effect on sales growth, Due primarily to the acquisition of Dial, sales in the amounting to 3.7 percentage points. Despite the dif- North America region rose by 76.5 percent to 2,000 ficult underlying economic conditions, organic sales million euros, with Laundry & Home Care and Cos- (after adjusting for foreign exchange and acquisitions/ metics/Toiletries mainly profiting. Sales growth ad- divestments) rose 2.9 percent. justed for foreign exchange amounted to 93.5 per- All of our business sectors reported an increase cent, with the business sectors Consumer and Crafts- in sales. Laundry & Home Care and Cosmetics/Toilet- men Adhesives and Henkel Technologies also con- ries generated the highest rates of growth at 17.7 per- tributing. cent and 18.7 percent respectively, primarily due to Sales in Latin America underwent significant the Dial acquisition, which was completed on March expansion – arising from both organic growth and 29, 2004. With a sales increase of 10.1 percent, the acquisitions – with an increase of 27.5 percent to Consumer and Craftsmen Adhesives business sector 471 million euros. The rise in sales after adjusting

26 Henkel Annual Report 2004 ing in the fiscal year, fiscal ing inthe region. ofthe dynamic growth ticularly fromthe Adhesives andalsoHenkel Technologies par- profited cent. Ourbusinesssectors ConsumerandCraftsmen 1,120 justing for foreign exchange, increasewas16.8 the per- rising by 10.9 percentto ad- 775millioneuros.After 4 – sales regionwith highly Asia-Pacific encouraging inthe –110 800 ble-digit percentage rates. growth Businesswasalso businesssectorswhich allthe contributed dou- with 910 –106 for foreign 2003 exchange amounted to 41.8 percentto 710 816 EBIT Exceptional items EBIT before exceptionalitems EBIT from Corporate EBIT from businesssectors in millioneuros 2004 EBITbybusinesssector 1) EBIT continuing operations Taking into exceptional accountthe items aris- 1) fe xetoa tm 706 after exceptionalitems in millioneuros oeCr oltisCatmn Technologies Craftsmen Henkel Consumerand Toiletries Cosmetics/ Home Care Laundry & 287 2003 2004 300 0020 022003 2002 2001 2000 2) 630 before exceptionalitems operating profit (EBIT) operating profit 194 2003 2004 602 225 in millioneuros 2) 141 Adhesives 2003 666 2004 150 710 194 2) 2003 2004 800 235 2004 in- 1,920 2004 2) fell by 1.1 percent orby adjusting 0.3percent after Europe/Africa/Middle East. There,operating profit exception the of regions,with bled ineachofthe lion euros. Corporateof the segmentwasanegative 110 mil- highest increaseinoperating profit. cost Henkel structure, Technologies generated the to animproved highersalescombining with thanks a21.56.1 percent.Andwith percentimprovement Adhesives increaseof reported anoperating profit Dial roseby 16.2 percent.ConsumerandCraftsmen atCosmetics/ToiletriesOperating profit including Care businesssector includingDialwas4.7percent. &Home Laundry couraging result. Theincreaseatthe cent (adjusted for foreign exchange: 16.2 percent). tolion euros,corresponding anincreaseof12.7 per- amountedtional items, to operating profit 800 loss amountingto 242millioneuros.Before excep- ongoodwillresultedperformed inrecognitionofa impairment408 millioneuros.Inaddition,the tests ures announcedinNovember 2004amounted to budgeted Advanced cost Restructuring meas- ofthe in anexceptional gain of1,770 millioneuros.The The exchange ofourinvestment inClorox resulted creased from706millioneurosto 1,920 millioneuros. 2004 EBITbyregion Encouragingly, dou- morethan operating profit Before exceptional items, operating result the All ourbusinesssectors contributed to en- this uoeArc/NrhAeiaLtnAeiaAsia-Pacific LatinAmerica Middle East NorthAmerica Europe/Africa/ 742 2003 2004 733 in millioneuros 2003 63 135 2004 Henkel Annual Report2004 2003 3 Management report 2004 13 2003 8 2004 29 mil- 27

Management report Management report

for foreign exchange. This was due to difficult mar- The budget breakdown envisages 57 percent of the ket conditions, particularly in Germany. However, costs resulting from personnel measures, 22 per- the Henkel Technologies business performed well cent from impairment charges and 21 percent from in this region. The profit increase in North America other expenses. The measures are expected to gen- of 114.4 percent (137.3 percent after adjusting for erate annual savings of around 125 million euros foreign exchange) is predominantly due to the earn- with effect from 2007. By 2006, the program is ex- ings contribution from Dial in the business sectors pected to signify around 3,000 redundancies world- Laundry & Home Care and Cosmetics/Toiletries. wide. Henkel Technologies also performed very well in North America. Goodwill impairment charges From a low base, operating profit in Latin Amer- We performed a comprehensive review to test for ica quadrupled (the increase after adjusting for for- impairment on goodwill arising from acquisitions. eign exchange was more than five-fold). Profits gen- We recognized impairment losses where, due to erated by the business sectors Consumer and Crafts- changes in circumstances and future prospects of men Adhesives and Henkel Technologies in this re- the business, the estimated cash flows were lower gion rose considerably. There was also a further in- than the carrying amount of the goodwill. Impair- crease in profitability in the Asia-Pacific region. There, ment losses recognized with respect to goodwill operating profit rose 257.3 percent or, adjusted for amounted to 242 million euros against total good- foreign exchange, 276.2 percent. will of 3,526 million euros. These charges related Further details relating to the performance of mainly to the Dexter and Multicore businesses in the individual business sectors can be found from Asia and North America, acquired in 2000. page 40 onward. Cost items Advanced Restructuring measures The cost of sales rose by 13.1 percent to 5,615 mil- Following the “Strong for the Future” special restruc- lion euros in 2004. The increase in this line thus turing program launched in 2001, and the subsequent matched the percentage growth in sales, albeit in Extended Restructuring projects initiated in 2003, the wake of increases in raw material costs during we instigated further measures in the year under the second half of the year. Gross profit rose from review in order to strengthen the profitability and 4,471 million euros in 2003 to 4,977 million euros to enhance the competitiveness of the Henkel Group. in the year under review, an increase of 11.3 per- The goal of the Advanced Restructuring measures is cent. Owing to intensive competition, the persist- to achieve improvements in efficiency and sustain- ently difficult market conditions prevailing in able cost reductions through effective site reorgani- Europe and the lower gross margin of Dial, the zation, closure of certain facilities, and streamlin- gross margin for the Group fell by 0.4 points to ing of administrative functions. The measures en- 47.0 percent. compass detailed individual projects affecting all At 3,156 million euros, the costs incurred for business sectors and account for a budgeted total distribution, customer support, advertising and cost of 408 million euros. The regional emphasis, sales promotion were 8.3 percent above the 2,915 proportional to sales volumes, lies in Europe and million euros recorded for the previous year. This North America. rather moderate rise as related to the growth in

28 Henkel Annual Report 2004 our participation in in our participation gain amountingto 30millioneurosresultingfrom prior-yeartion, the wasboosted by figure aone-time closingdatefrom the (November 22,2004).Inaddi- investment effect incomefromthis with no further exchangesult ofthe ofourstake inClorox, was there netinterestand anincreaseinthe expense.Asare- decline wasadecreaseinincomefromparticipations to substantial 1millioneuros.Themaincauseofthis items totalThe financial decreasedby 61 millioneuros Financial items year. to 146 millioneuros,12 millioneurosbelow prior quisitions operating income amounted made.Other non-capitalized incidentalcosts relatingto ac- the 103 millioneuros.Thisisprimarily attributableto operating chargesOther roseby 26millioneurosto Other operatingincomeandcharges euros to 22millioneuros. charges restructuring fellCurrent from37million 2003 to year 200millioneurosinthe underreview. increased substantially from125 millioneurosin last –appliedfor time– goodwill amortization the sales, by 12.2 percentto 570millioneuros. tion ofsales,was2.6percent. and development expensesexpressedasapropor- average mark.TheR&Dratio, i.e.research their left development costs atDialascompared to Group the previous year. lower Hereagain, the researchand development inthe was5.8percenthigherthan panies. average the sales than remainingGroupcom- ofthe lower marketing andsellingcosts asapercentage of by Dial.Dial’ssalesstrategy entailssignificantly broughtto bear sales isattributableto influence the Because of the acquisitionsBecause ofthe made,scheduled Administrative to expensesroseinproportion costAt ofresearchand 272millioneuros,the Clorox’s pro- sharebuy-back 3) 2) 1) ■ ■ Net earnings After deductingminority interestsAfter amountingto 1,736 millioneuros,ariseof1,206 millioneuros. assets amountingto 72millioneuros. tax tax-deductible,givingrisetoare partly deferred measures restructuring costs ofthe the factthat the previouscrease ascompared year the isdueto with Internal by Revenue the as defined Code.Thede- USAasatax-exemptbe recognizedinthe exchange euros. We Clorox the transaction presumethat will euros). Taxes onincome amounted to 185 million euros) andgoodwillimpairment losses(242million measures(408 million restructuring cost ofthe the of ourClorox stake (1,770 millioneuros),andalso t in cluded from 768 millioneurosto 1,921 millioneuros.In- beforeEarnings taximproved by 1,153 millioneuros, anddividend Net earnings ed interest year. rest incomefor ofthe the loanby CognisinMayof the removed associat- the acquisitions. redemptionnance the Inaddition,the needtocrease inborrowings arisingfromthe fi- declineinliquid substantial in- the fundsandthe Thenet interestgram. expenseroseasaresultof 1,736 millioneuros afterexceptionalitems 530 millioneuros includinggainfrom Clorox share buy-back 541 millioneuros afterexceptionalitems ■ ■ 505 Earnings afterminorityinterests Earnings Net earnings Net earnings increased byNet 530millioneurosto earnings 0020 022003 2002 2001 2000 468 his is the gain arising from the exchange gain arisingfromthe his isthe in millioneuros 476 1) 437 431 435 Henkel Annual Report2004 500 Management report 2) 489 544 2004 3) 543 29

Management report Management report

Preferred share dividends in euros Earnings per preferred share before and after goodwill amortization in euros

1.301) 15.21 1.20 1.12 1.12 1.12 3.08 6.50

3.00 12,13 12.13 5.21 4.51 4.52 4.32 4.03 4.34 1.39 1.26 1.27 0.87 0.87 0.97 3.82 3.50 3.65 3.47 3.25 3.05 3.06

2000 2001 2002 2003 2004 2000 2001 20011) 2) 2002 2003 20032) 2004 20041) 1) proposed ■ ■ Goodwill amortization ■ ■ Earnings per preferred share

1 million euros, the earnings figure after minorities 1) before exceptional items 2) excluding gain from Clorox share buy-back is 1,735 million euros. The annual financial statements of Henkel KGaA Earnings per preferred share rose from 3.65 euros are summarized on page 94. in the previous year to 12.13 euros. Earnings per or- In view of this positive earnings performance on dinary share increased from 3.59 euros to 12.07 euros. the operating business side, coupled with solid cash The reason for the significant rise is the gain arising flow generation, the proposal put to the Annual from the exchange of the Clorox stake. After adjust- General Meeting will be for a ten eurocent increase ing for exceptional items in both years in the com- in the dividends payable on both classes of share. parison, earnings per preferred share increased by Amounts of 1.30 euros per preferred share and 1.24 10.1 percent from 3.47 euros to 3.82 euros. euros per ordinary share will yield a payout ratio The diluted earnings per share figure was 3 eu- of 33.4 percent. rocents lower than the basic earnings figure (basis: The payout ratio is calculated on the basis of net earnings after minority interests and exception- earnings after minority interests and after adjust- al items). ing for the exceptional items arising from the Clorox exchange deal, the cost of the Advanced Restructur- Return on capital employed (ROCE) ing measures and goodwill impairment charges. The At 30.9 percent, the return on capital employed (ROCE) adjusted earnings figure after deducting minority in- almost doubled compared to the previous year. The terests was 543 million euros. The level of dividend reason for the improvement again lay in the excep- payout is essentially aligned to profit developments, tional items occurring in 2004. Without the associat- subject to a minimum of 30 percent of Henkel Group ed one-time amounts, ROCE would have decreased to earnings after minority interests and adjustment for 13.0 percent due to the acquisitions made. These led exceptional items. to a significant increase in capital employed for the Laundry & Home Care, Cosmetics/Toiletries and Con- Earnings per share (EPS) sumer and Craftsmen Adhesives business sectors, ex- Basic earnings per share are calculated by dividing ceeding their profit improvements in each case. Henkel earnings after minority interests by the weighted av- Technologies was the only business sector to record a erage number of shares outstanding during the re- decrease in capital employed and an increase in ROCE porting period. for the year under review.

30 Henkel Annual Report 2004 soaps, liquid soapsandshower gels. personalcaresegmentincludesbar portfolio inthe USbusinessofCosmetics/Toiletries.ens the The Dial review. 1,927 millioneuroson acquisitions year inthe under &HomeCarebusinesssector spent total, Laundry the erated salesamountingto 154 millionUSdollars.In operations gen- 2003,these Korea. Infiscal in South Americanconsumergoodsmarket North and in the help to ouractivitiesandpositionsboth strengthen hold cleanerandinsecticidebusinessesacquired will Henkel Ibéricaandoperating businesses.Thehouse- tion to Clorox cashassets,alsocontainsthe stake in acquired which,inaddi- fromClorox asubsidiary The Clorox Company, Oakland,California, USA,we itsMasbrand. sales of27millionUSdollarswith 2003,Master Productsgenerated Infiscal softeners. prising powder detergents,soaps and fabric laundry by addingliquid detergents to ourrange alreadycom- able to extend ourportfolio Mexicanmarket for the acquisition,Mas brand. Throughthis we have been ness fromMaster ProductsGroupoperated underthe Mexico, Henkel acquired liquid the detergents busi- ated salesof 1,345 millionUSdollars. 2003,Dialgener- eners andfood products.Infiscal care,personalairfresh- areaoflaundry in the Americancontinent market North positionsonthe es including Cosmetics/Toiletries. Dialholdsleading ization ofHenkel’s overall consumergoodsbusiness- global- further American homecaremarket andthe important step for into North Henkel’s the entry constitutedzona, USAinparticular astrategically acquisition ofTheDialCorporation, Scottsdale,Ari- andLatinAmerica.The itsportfolio inNorth thened streng- & HomeCarebusinesssector specifically dry ofitsinternational strategy, growth As part Laun- the Acquisitions anddivestments The takeover ofDialalsosubstantially strength- exchange ofthe As part ofourinvestment in To itsdetergents strengthen activitiesin further of ourautomotive business,we increasedourstake ized salesamountingto 61 millionUSdollars. 2003real- USA,Australiathe UK,andinfiscal andthe sulation inpassenger cars.Thecompany isactive in autobody reinforcement andnoisevibration in- and markets sealants andstructural components for future-aligned technologies. Orbsealmanufactures automotive whileinvesting industry inarange of to itsleadingposition asapartner the expanded Missouri, USA,Henkel Technologies hasfurther are transacted industrial customers. with of its sealants andcoatingmaterials.sales thirds Two ofadhesives, andisaleadingmanufacturerthere ket The company ispredominantly active USmar- inthe 2003amounted toin fiscal 372millionUSdollars. Sovereign, Chicago,Illinois,USA.Sovereign’s sales acquisition the of Americawith business inNorth business sector. ourCosmetics/Toiletries997 millioneuroswithin Cosmetics reported salesof47millioneurosin2003. worldwide professional hairdresser business.Indola ourpositioninthe strengthens Benelux, andthus countries suchasItaly, UK,France, the Spainand fessional haircosmeticproductsinmajor European Park, Illinois,USA.IndolaCosmeticsmarkets pro- hair salonbusinessofAlberto-Culver Inc.,Melrose euros. 2003,ARLgeneratedIn fiscal salesof 102 million USAaswellment inthe asinCanadaandMexico. pies leadingmarket styling seg- positionsinthe ion-driven haircareandstyling productsandoccu- fash- USA.ARLoffers hair cosmeticsbusinessinthe year underreview, supplementingourexisting thus atories (ARL),Costa Mesa,California, USAinthe Henkel alsoacquired Advanced Research Labor- As another importantAs another step strengthening inthe acquisition the ofOrbsealLLC, Richmond, With Henkel Technologies itsindustrial strengthened In total, we madeacquisitions amountingto In Europe,we acquired IndolaCosmetics the Henkel Annual Report2004 Management report 31

Management report Management report

in the Japanese joint venture Cemedine-Henkel to sives to supply the local market in Bucharest, 51 percent. Romania (Consumer and Craftsmen Adhesives) Acquisitions by the Henkel Technologies busi- Commissioning in Kundl, Austria, of a new ness sector amounted to 365 million euros. micro-filtration plant for increasing yield and The takeover of Sovereign also significantly im- improving the quality of detergent enzymes proves the market position of our Consumer and (Laundry & Home Care) Craftsmen Adhesives business sector in the USA. A third of Sovereign sales are for the DIY and crafts- Investments in intangible assets within our contin- men segment, thus strengthening Henkel’s market uing operations amounted to 26 million euros. position as a leading supplier of assembly adhesives. Expenditure on property, plant and equipment In total, Consumer and Craftsmen Adhesives in businesses acquired in 2004 totaled 202 million spent 129 million euros on acquisitions in the year euros. Investments in acquired intangible assets under review. amounted to 3,726 million euros. Of this figure, 1,143 million euros was for the acquisition of trade- Capital expenditures mark rights (arising particularly from the Dial and Capital expenditures (excluding financial assets) in ARL acquisitions, and also the operating businesses 2004 totaled 4,298 million euros. acquired from Clorox), while the cost of acquired Investments in property, plant and equipment goodwill was 2,583 million euros. within our continuing operations amounted to 344 In the regional breakdown, our expenditure em- million euros, representing an increase of 23 mil- phasis in 2004 lay in North America and Europe. lion euros compared with the previous year. For the The Dial and ARL acquisitions led to a significant most part, these investments were used to develop increase in the share of capital expenditures attrib- and expand production capacities. The major indi- utable to North America. vidual projects implemented in 2004 were as follows: In 2005, our investments in property, plant and Capacity increase and relocation of our PVC equipment will focus on Europe. Important projects production capability for closer proximity to in the Laundry & Home Care business sector will be the major automobile manufacturers in geared to optimizing our liquid product manufac- Guangzhou, China (Henkel Technologies) turing processes and improving our formulations. Construction of a new factory for the manufac- The Cosmetics/Toiletries business sector intends to ture of knifing fillers, surfacers and tile adhe- further optimize its supply chain, while Consumer and Craftsmen Adhesives is to construct a new build- 2004 capital expenditures in million euros ing adhesives plant in Russia. The Henkel Technologies business sector will be investing predominantly in Continuing Acqui- capacity expansions in Germany and the USA. operations sitions Total Property, plant and equipment 344 202 546 Intangible assets 26 3,726 3,752 Total 370 3,928 4,298

32 Henkel Annual Report 2004 Balance sheetstructure quisitions made, this significant increaseisprimar- quisitions significant made,this ac- ries andtrade accountsreceivablebecauseofthe caseofinvento-moderate inthe increaseoccurred 5,411 millioneuros ascompared to 2003.Whilea 27, assets. 2004wasrecognizedunderfinancial The Sovereign acquisition completed onDecember in May 2004(413 million eurosincludinginterest). the 385 millioneuros, and Cloroxof the investment anequity with valueof 1,038 millioneuros. depreciation by 92millioneuros. in ourcontinuingoperations exceeded scheduled ital expendituresonproperty, plantandequipment Dialacquisition. the At 344millioneuros,cap- with euros, mainly came dueto trademark rights that the will. intangibleassetsroseby 1,014 Other million increasecamefromadditionsto ofthe good- portion 4,554 millioneuros.At 1,899 millioneuros,amajor intangible assetsgrewby 2,913 millioneurosto 7,400 acquisitions, millioneuros.Asaresultofthe tions madein2004. acquisi- consolidationofthe is dueto first-time the to 13,138 expansion millioneuros.Thissignificant 2004,total assetsroseby 3,776In fiscal millioneuros Balance sheetstructure Assets andfinancialanalysis Property, plantandequipment/Intangible assets Current assetsroseby 1,068Current millioneurosto Financial assets Fixed assetsincreasedby 2,677millioneurosto Receivables/Miscellaneous assets This resulted disposal fromthe declined by 361 millioneurosto in millioneuros Financial assets loan repayment by Cognis fwihi ofwhichin% of whichin% Inventories sesShareholders’ EquityandLiabilities Assets ,6 9,362 9,362 2003 38 15 36 11 13,138 042004 2004 35 48 9 8 13,138 previous year, again dueto acquisitions. the liabilitieslikewiseother increasedcompared to the to 4,751 millioneuros.Trade accountspayable and acquisitions, liabilitiesroseby 1,654 millioneuros acquisitions.sion obligations assumedfromthe increased by 173 pen- millioneuros as aresultofthe to 304millioneuros.Inaddition,pensionprovisions re for the visions acquisitions, consolidationofthe andpro- first-time tax provisions of274 millioneurosarisingfromthe eur lion tonet earnings revenue reserves. total of1,550 millioneuroswastransferred from goodwill impairment losses(242millioneuros).A Restructuring charges (408millioneuros)andthe stake (1,770 Advanced the millioneuros)andboth exceptionalthe exchange gain fromthe ofourClorox amounting to 1,735 millioneuros.Thetotal includes minorityinterests after figure high netearnings euros.Thissubstantial riseresulted fromthe lion ests increasedfrom3,311 millioneurosto 4,588mil- Advanced Restructuring cost.the par to the due – euros lion change ofourstake inClorox. ex- ily dueto cashamountsarisingfromthe the 12 24 15 14 35 With the increase in borrowings to finance the increaseinborrowings to the finance With Provisions roseby 904millioneurosto 3,783mil- Shareholders’ equity excluding minorityinter- Deferred taxassetsincreasedslightly –by 31 mil- 2003 13 18 20 13 36 os, dueprimarily to anincreaseindeferred Shareholders’ equity Other liabilities Borrowings Other provisions Pension provisions structuring measures amounting structuring tial tax-deductibilityof Henkel Annual Report2004 Management report 33

Management report Management report

Cash flow statement (summarized) in million euros 2003 2004 Operating profit (EBIT) 706 1,920 Income taxes paid – 348 – 276 Depreciation/Write-ups of fixed assets (excl. financial assets) 405 851 Net gains/losses from disposals of fixed assets (excl. financial assets) –102 –1,785 Change in net working capital –141 213 Cash flow from operating activities 520 923 Capital expenditures on intangible assets –25 –26 Capital expenditures on property, plant and equipment – 321 – 344 Proceeds from disposals of fixed assets 482 2,763 Dividends received/Net interest –76 –92 Free cash flow 580 3,224

The complete balance sheet of the Henkel Group can taled 3,420 million euros. At 370 million euros, in- be found on page 53. vestments in continuing operations were 24 million euros above prior year. Of this amount, Laundry & Cash flow statement Home Care accounted for 139 million euros, Cos- At 923 million euros, cash flow from operating activ- metics/Toiletries for 50 million euros, Consumer ities was 403 million euros above the prior-year figure. and Craftsmen Adhesives for 56 million euros, and A major cause for the significant rise was the 205 mil- Henkel Technologies for 94 million euros. lion euro increase in earnings (before exceptional The cash flow from financing activities fell by items) before interest, tax, depreciation and amorti- 53 million euros to 761 million euros. The decrease zation (EBITDA). There was also a decrease in in- was primarily due to a smaller increase in borrow- come taxes paid. The tax payments of the previous ings as compared with 2003, and a lower net balance year contained 150 million euros relating to the sale from dividends and interest paid and received. of our former chemicals business Cognis in 2001. The Free cash flow amounted to 3,224 million euros, change in net working capital yielded a positive effect 2,644 million euros more than in the previous year. of 120 million euros (before exceptional items), this Included in this figure are proceeds amounting to being attributable to a lower increase of receivables and 2,282 million euros arising from the exchange of our miscellaneous assets compared to the previous year. Clorox stake, and 413 million euros from the redemp- Cash flow from investing/acquisition activities tion by Cognis of its loan. amounted to –1,027 million euros. This meant an in- The free cash flow figure for the previous year crease in expenditures in this category of 664 mil- included the proceeds from the sale of our stake in lion euros compared to the previous year. The sig- Wella (361 million euros) and the tax payments aris- nificantly higher cash outflow is due to the acquisi- ing from the sale of Cognis (150 million euros). After tions made, particularly Dial, ARL and Sovereign. adjusting for these exceptional items, free cash flow The cash inflows arising from the exchange of our showed an increase of 160 million euros, rising from Clorox investment (2,282 million euros) and repay- 369 million euros to 529 million euros. ment by Cognis of its loan (413 million euros) offset The detailed cash flow statement can be found a portion of the acquisition expenditures, which to- on page 55.

34 Henkel Annual Report 2004 Total Asia-Pacific Latin America North America Europe/Africa/Middle East pation rate stood at42percent. entitledtothose take InGermany, part. partici- the review. to This corresponds around30percentofall year planduringthe under tries participated inthe year. Inall,9,270employees fromalmost 50coun- whichwasextendedShare Program, for afurther Values” (seepage 1). ment aslaiddown andpublishedinour werequirement. this, aremeetingourcommit- With ourown higherthan recruitment issignificantly that once again representingalevel oftraining provision ed 465young peopleastrainees and apprentices– and sales–decreasedto 19.0 percent. relationshipbetweendescribes the payroll costs to 2,010 millioneuros.Thepayroll cost ratio –this 212,100 euros.Henkel Grouppayroll costs amounted to about79percent. ployees outsideGermany roseby almost two points Henkel Groupwas49,947. ofem- Theproportion averageIn 2004,the numberofemployees atthe would have decreasedby 3.1 percentto around47,100. and Indola. acquisitions, ofDial,ARL the those andparticularly headcount increasedby around4,100 asaresultof year endofthe underreviewat the was51,200. The The numberofpeopleemployed Henkel by the Group Employees Employees There have beenmany subscribersto Employee the year, endofthe At the Henkel inGermany employ- Per capitasalesincreasedby 8.8percentto Excluding acquisitions, the employee numbers (as ofDecember31) 093100.0 60,903 07967.0 40,759 ,5 14.7 6.9 8,950 4,236 11.4 6,958 00% 2000 “Vision and 20068.7 32,030 663100.0 46,623 ,4 15.1 6.2 7,048 2,870 10.0 4,675 01% 2001 the surveythe isto berepeated onanannualbasis. improvementswhether courseoftime, ensueinthe initiatives onaglobal scale.Inorder to determine and weaknesses analysis, we launchedanumberof ternal globalcomparison. basisofastrengths Onthe wide management survey were subjected to anex- aunit-basedplan(Pensionswithin 2004). plans inGermany were predominantly harmonized our businessresults. rectly influence ofemployees those holders with whoareableto di- way,In this we interests combinethe ofourshare- Henkelto prevailing preferred priceofthe share. the valueofwhichcorresponds monetary tual shares,the rightto numberofvir- managers the acertain earn ria (for example, participating the netearnings), target attainmentinrelationto internal crite- the Henkel level preferred share.Dependingonthe of ofthe priceperformance budget andthe financial ternal target criteria derived medium-term fromthe long-term compensationthe ofourmanagers to in- called CashPerformance Plan.Thisnew planlinks change-over Stock fromthe Incentive Planto ourso- For year around700seniormanagers, this saw a we negotiationsandlonger- succeededthrough secondhalf.Nevertheless, during2004 during the year inthe underreview,nificantly particularly The market pricesfor raw materials increasedsig- Procurement At the beginning of 2004, the resultsofaworld- beginningof2004,the At the benefit 1,Effective defined January 2004,the 47671.5 34,736 868100.0 48,638 ,8 13.1 6.2 6,386 9.2 3,042 4,474 02% 2002 868100.0 48,628 70.3 34,189 ,1 13.0 8.1 6,312 8.6 3,946 4,181 03% 2003 Henkel Annual Report2004 Management report 36265.8 33,692 120100.0 51,200 ,1 12.5 8.5 6,411 4,325 13.2 6,772 04% 2004 35

Management report Management report

Purchase volumes by business sector amount, 34 million euros went into central research and 238 million euros was allocated to the product Henkel Technologies 29 % and process development activities of the business Laundry & Home sectors. Expenditure on technical services for our Care 41 % customers amounted to 99 million euros. The average number of employees working in research, product development and application engineering was Consumer and Craftsmen approximately 2,800, with the majority operating Adhesives 13 % Cosmetics/Toiletries 17 % in Germany, Ireland, France, Japan and the USA. We utilize all the sources of R&D information term contracts in avoiding or at least restricting available to us from around the world in our endeav- cost increases arising from price changes. Overall, or to secure the sustainable success of our Company, the cost of raw materials, supplies, packaging mate- deploying both internal and external expertise in rials, merchandise and outside services increased to order to strengthen and expand our product portfo- 4.4 billion euros (previous year: 3.7 billion euros), lio and develop new markets. mainly as a result of the acquisitions. Analyses performed in 2003 revealed that the five most impor- R&D expenditure in million euros tant commodities accounted for just 15 percent of the total raw material purchase volume, and the 320 272 five most important suppliers accounted for just 2551) 259 257 11 percent of the procurement volume. Henkel is thus extensively independent of individual vendors. We intensified our sourcing activities in Eastern Europe and Asia in fiscal 2004. We also once again significantly expanded the use of our e-business instruments, exceeding for the first time the billion 2000 2001 2002 2003 2004 euro mark with respect to purchasing volumes han- 2.5 % 2.7 % 2.7 % 2.7 % 2.6 % dled through electronic networks. This more than R&D ratio (research expenditure as a proportion of sales) doubles the 2003 amount of 450 million euros. Our 1) with effect from 2001, continuing operations only activities in this domain involve both external mar- ketplaces and also an internally developed vendor R&D expenditure by business sector platform. Corporate 13 % Laundry & Home Care 27 % Research and development

Expenditure on research and development at the Cosmetics/ Henkel Toiletries 15 % Henkel Group amounted to 272 million euros, com- Technologies 37 % pared to 257 million euros in the previous year. The Consumer and Crafts- 2004 amount corresponds to a share of sales of 2.6 men Adhesives 8 % percent (previous year: 2.7 percent). Of the total

36 Henkel Annual Report 2004 being pursuedatCentral Research: pansion. openingupnew possibilitiesforthus portfolio ex- Central Research arefed into businesssectors, the velopment ormanufacturingneeds.Theresultsfrom activitiesandto keting projects arealignedto requirements the ofourmar- new productsandproductionprocesses.Individual for scientists develop innovative basictechnologies biology, andengineeringtechnology. chemistry Its of Our Central Research unitisactive fields inthe corrosion protectioncorrosion for steel andaluminum Elaboration ofnew conceptsofsystem-integral dustries adhesives automotive for the andaerospacein- Development ofnew long-life high-performance automotive andelectronicengineeringindustries comprising polymer materials aerospace, for the composite ofhigh-performance Creation systems tures atlowhance performance washingtempera- anden- prove andstain removal dirt efficiency im- and cleaningproductsinorder to further Development ofnew enzymesfor detergents activity principlesofbiomimetic cal aging,usingthe care productsdesignedto counter dermatologi- lations for for skincosmetics,particularly new Development ofinnovative andeffective formu- consumer canreadily perceive andappreciate hair(follicles) andgenerateof the the that effects stimulate biologicallythat active the portions Development ofinnovative active ingredients sonal careandengineeringapplications micro-organisms inrelationto homecare,per- bating infectious, odor-forming and destructive ofourproductsincom- efficacy Increasing the The following projectscurrently areamongthe ouroperational productde- mers. Within this context, researchcompany this the mers. Within cell physiology, new materials andfunctionalpoly- ofbiotechnology, fields and facultyprofessors inthe wethese areableto work universities closely with ly participate in variousresearchenterprises. Through In additionto ourinternal activities,we alsoactive- followingcommercialization ofthe concepts: realizationand inthe efforts in recognitionoftheir awards went to four projectteams interdisciplinary “Fritz Henkel Prizefor Innovation”. In2004,the development projectswere alsoselected for the areas ofbusinessfor Henkel. criterion the ofopeninguppotential new satisfies projects selectedunit. Eachofthe accolade for this Central Researchnology resultsemanatingfromthe “Invention Awards” for outstanding research/tech- time,we first conferred anadditionalfourFor the treatment timesandzerowaste disposal lowertion combinedwith energycosts, shorter Improved protec- paintadhesionandcorrosion lution inindustrial metalpre-treatment: Bonderite NanoTech nanotechnology –the revo- fering extremeadhesive power granulate form for wallpaperingmachines,of- Metylan TGPower Granulate: First paste in gray coverage, durability andcolorbrilliance Intensive setsnew colorant standards that in Igora Vibrance fromSchwarzkopf Professional: home the product for applicationsthroughout Bref Power cleaning cleaner:High-performance processing systems production usingmodular, intelligent image Quality monitoring ofproductpackagingsin and toxicological productcharacteristics Computer-aided predictionofphysico-chemical As inprevious years, exemplary researchand Henkel Annual Report2004 Management report 37

Management report Management report

SusTech Darmstadt was awarded the 2004 Innova- are in no doubt that effective environmental protection Prize conferred by the state of Hesse for the tion and corporate social responsibility constitute successful development of the toothpaste ingredient major prerequisites for our entrepreneurial success. Nanit® active. To help us meet the concomitant demands, we Through their work, our scientists and engineers have revised our internal standards for safety, health are today laying the basis for our business success and environmental protection, in place since 1998, tomorrow, providing the essential framework for and added to them duties derived from our corpo- Henkel’s “Quality Worldwide”. Even at the research rate social responsibility. We have embedded the and development stage, we align the quality require- corresponding stipulations relating to all our busi- ments applied to the different needs of the markets ness processes within our integrated management and regions concerned – up to and including specif- systems. Adherence to these Group-wide require- ic wants and expectations of individual industrial ments is critically examined on a regular basis by customers. Our service units also set quality stan- internal audits. dards with their special technical competencies in The code of conduct binding on all our employ- fields such as microbiology, dermatology, technical ees was also revised in 2004. This too derives from analysis and product safety. our vision and our values – the fundamental princi- We currently protect our technologies around ples to which we as a company are committed. Also the world on the basis of more than 7,600 patents. incorporated are the obligations arising out of the There are also over 5,200 patent applications pend- Global Compact initiated by the United Nations. ing. And we own more than 2,000 registered designs Henkel joined the Global Compact in July 2003, thus as part of our regime to protect our intellectual underlining our commitment to uphold human property. rights, including the basic rights of employees, and Further information on our research and devel- to promote environmental protection. opment activities can be found on our internet site Day in day out, people trust the brands and tech- at www.innovation.henkel.com. nologies of Henkel in more than 125 countries a- round the world. First-class quality means not only Sustainability ease of application, convenience and high product performance but also comprehensive product safety Innovative brands and technologies are indispensa- and environmental compatibility. Consequently, we ble for our financial success. They play an essential ensure, right at the initial research and product de- role in enabling us to meet our social responsibili- velopment stages, that our products and technolo- ties. Our products combine high customer benefit gies are safe and have no deleterious effects on health with ecological compatibility, and so provide us with or the environment, provided they are used and ap- competitive advantages in the marketplace. Henkel plied in the appropriate manner. is dedicated to the principles of sustainability and In keeping with our position as a responsible corporate social responsibility in the operation of corporate citizen, we provide financial and material its businesses. This comprehensive undertaking has support for social projects, the environment, educa- been adopted as one of our ten corporate values. We tion, science, health, sport, art and culture. Since

38 Henkel Annual Report 2004 cated website www.sd.henkel.com. sustainable development can befound atourdedi- we of that haveprogress field beenmakinginthe information, key latest dataandthe news onthe background Sustainability further Report, current 150the major companies German considered.The Sustainability wasawarded Report placeamong first mag the by sioned initiative. GlobalCompact underthe obligations asdefined ourCompanywithin andalsosatisfyourreporting highpriorityassignedtoment the sustainability al Sustainability Suchpublicationsdocu- Report. wasreplacedin2001 that ment Report by anannu- sinceitsestablishment in2001.cal indexFTSE4Good international ethi- Henkel ofthe hasalsobeenpart Dowthe JonesSustainability Index(DJSI)in2004. timeinarowHenkel sixth wasincludedfor in the 188 figure, Of this were MITchildren’sprojects. 60countries. projectsinmorethan profit-making Tomorrow), Henkel supported atotal of786non- its worldwide MITinitiative (=Make anImpact on ed by ouremployees andpensioners.In2004,under al encouragement work voluntary for perform- the 1998, we have alsobeenactive inproviding materi- In acomparison commis- ofsustainability reports From 1992, we publishedanannualEnviron- As aresultofitsdedicationto sustainability, azine “Capital”, the 2003Henkelazine “Capital”,the Henkel Annual Report2004 Management report 39

Management report Management report: Laundry & Home Care

Laundry & Home Care

Organic sales growth –0.7 percent Operating profit including Dial up 4.7 percent ROCE at 14.9 percent Acquisition of The Dial Corporation in the USA

Key financials1) in million euros 2003 2004 Change Sales in million euros Sales 3,074 3,617 17.7 % Proportion of Group sales 33 % 34 % 1 pp 3,617 EBITA 295 351 19.2 % 3,082 3,131 3,074 2,835 Return on sales (EBITA) 9.6 % 9.7 % 0.1 pp EBIT 287 300 4.7 % Return on sales (EBIT) 9.3 % 8.3 % –1.0 pp Return on capital employed (ROCE) 33.1 % 14.9 % –18.2 pp EVA® 188 91 – 51.5 %

2000 2001 2002 2003 2004 pp = percentage points 1) calculated on the basis of units of 1,000 euros

Economic environment and market position Sales and profits For the first time in many years, the world laundry and At 3,617 million euros, sales at Laundry & Home Care home care market declined slightly. In many countries, were 17.7 percent above prior year. After adjusting for this was due to intensified competition in the price and foreign exchange, the growth rate was 21.9 percent. trade allowances arena. The impact on our largest mar- This is due particularly to the acquisition of Dial. ket segment, namely that of heavy-duty detergents, was The anticipated recovery in the market environ- particularly apparent. There was, however, further ment of Western Europe failed to materialize. In Ger- growth in the market segments special detergents and many, France, Italy and the Netherlands, the situation household cleaners (including air fresheners). worsened, particularly burdening our business during As a result of the acquisitions made in the year the first half of the year. By contrast, most of the na- under review, we now occupy third position in the tional markets in Eastern Europe performed well. world market. We are the number two in Europe, by far In the Middle East region, the emphasis was on the largest regional market, and the number three in qualitative growth. We achieved a significant improve- Africa and the Middle East. With the Purex brand, more- ment in our market position in Central America. over, we also occupy a leading position in the USA. Following the exchange of our stake in Clorox, we Sales development have acquired in Soft Scrub a household cleaner brand 2004 that holds a strong position in the USA. Having also en- Change versus previous year 17.7 % tered the insecticide business, we now have a presence Foreign exchange – 4.2 % in this segment in North America and South Korea. At constant exchange rates 21.9 % of which organic – 0.7 % acquisitions/divestments 22.6 %

40 Henkel Annual Report 2004 grouped In Germany, ourspecialdetergents are successfully provided aneven uswith stronger market position. countries ofEastern MiddleEast andthe Europe the Color inMexicoandalsoexpansionofourrange inAsia, detergents impetus. growth bility allprovided significant detergents enhanced dermatological compati- offering formula for launchof ourpremium brands andthe such asWeißer OXI Riesewith energy, ShortWash the recessive market. Performance-enhancing innovations we succeededindefending ourpositioninaslightly year. secondhalfofthe tion aroundinthe Asaresult, ous market initiatives, we were situa- ableto the turn competitive acombinationofvari- environment. With year,of the frommarket weakness andanaggressive half first operations duringthe particularly suffered, hand,ourcontinuing other Dial brand Purex. Onthe during 2004. ofitsmarketly increasedsales inallthree segments &HomeCarebusinesssector significant- The Laundry Market segments employed. chargeshigher amortization andanincreasein capital goodwill acquired year inthe under review leadingto level previous yearthe ofthe to 14.9 the percent,with oncapitalemployedThe return (ROCE) dippedbelow onsales(EBIT)fellThe return by 1.0 percentage points. justing for foreign exchange amountingto 5.8percent. ad- riseafter 4.7 percentto the 300millioneuros,with ener andfood businessesdeveloped encouragingly. spite anincreaseincompetition. ourairfresh- Both heavy-duty detergentsposition inthe segmentde- USA,HenkelIn the managed to holdonto itsmarket We Europeanmarket leaderinthe arethe detergentsHeavy-duty (EBIT)improvedIncluding Dial,operating profit by and marketed Perwoll brand. underthe We segment. Theacquisition brand Mas ofthe profited from the acquired fromthe profited special digit percentage rise. adjusting for foreign exchange to undergoadouble- above market the average after and operating profit about 1percent. We Americanto expectmarket inNorth be growth countriesinWesternthe Europeisoneofstagnation. to driver forecast beagrowth whilethe for most of gional breakdown, Eastern Europeislikely onceagain countriesofrelevance to recent inthose us.Inthe We expect2005to bringamarket of1to growth 2per- Outlook pared to 210 millioneurosin2003. represented atotal spendof2,609millioneuroscom- projects. Capitalexpendituresincludingacquisitions material management series ofefficiency-enhancing technology, ecologicalsite protection measuresanda Saudi Arabia andmademajor investments inenzyme We alsotook anew detergents onstream in factory newlynologies, e.g.for the launchedPowder Pouches. in Europeandinvested ininnovative powder tech- productionofliquidour capacitiesfor the detergents yearDuring the underreview, expanded we further enhancement programs Capital expenditures andefficiency ing products. wasmainly driven by ourmanualdishwash- growth majorother markets ofEurope.OutsideEurope, price-sensitive market German aswell asinallthe expectations, achieving remarkablesuccessinthe quarter third exceededcleaner launchedinthe our successful.Theultra-stronghas beenvery BrefPower dry boosters active with oxygen. dry fr also profited 1) see footnote1onpage51 For 2005,we inorganic expectgrowth salesto be Our development inthe Management report: Laundry&HomeCare om highdemandfor ourOXI laun- 1) household cleaners Henkel Annual Report2004 segment 41

Laundry & Management Home Care report Management report: Cosmetics/Toiletries

Cosmetics/Toiletries

Organic sales growth 1.8 percent Operating profit including Dial up 16.2 percent ROCE at 14.0 percent Acquisition of The Dial Corporation and ARL in the USA

Key financials1) in million euros 2003 2004 Change Sales in million euros Sales 2,086 2,477 18.7 % Proportion of Group sales 22 % 23 % 1 pp 2,477 EBITA 228 291 27.5 % 2,116 2,029 2,085 2,086 Return on sales (EBITA) 10.9 % 11.7 % 0.8 pp EBIT 194 225 16.2 % Return on sales (EBIT) 9.3 % 9.1 % – 0.2 pp Return on capital employed (ROCE) 22.6 % 14.0% – 8.6 pp EVA® 107 63 – 41.2 %

2000 2001 2002 2003 2004 pp = percentage points 1) calculated on the basis of units of 1,000 euros

Economic environment and market position sure on our branded consumer goods business. Within There was little change in the market conditions that Eastern Europe, the Ukraine and Russia continued to prevailed in fiscal 2004. Overall, the world cosmetics show encouraging developments. market grew by just 2 percent, with developments re- As a consequence of the Dial and ARL acquisitions, maining at the lower end of our expectations. we were able to substantially strengthen our North In order to reduce our dependence on the Euro- American business. pean market and achieve additional profitable growth, The Asia-Pacific region saw an increase in sales we acquired two North American companies: Dial and compared to the previous year thanks to growth in Advanced Research Laboratories (ARL). With the acqui- China, India and Australia. Japan continued to suffer sition of ARL, we have attained a leading position in from a declining market and an aggressive competitive the styling business in North America. Dial is number environment. three in the North American body care market. The At 225 million euros, operating profit (EBIT) in- takeover of Indola strengthens our hair salon business cluding Dial was 16.2 percent above prior year. After in Europe. adjusting for foreign exchange, the rise was 19.0 per-

Sales and profits Sales development Sales increased by 18.7 percent to 2,477 million euros. 2004 After adjusting for foreign exchange, the rise was 21.8 Change versus previous year 18.7 % percent. Foreign exchange – 3.1 % Western Europe profited from our good business At constant exchange rates 21.8 % performance in Italy and Spain. In Germany, the de- of which organic 1.8 % clining market and increasing competition put pres- acquisitions/divestments 20.0 %

42 Henkel Annual Report 2004 Management report: Cosmetics/Toiletries

cent. The return on sales (EBIT) was 9.1 percent. With tooth whitening products with the launch of Express the acquisitions increasing capital employed, there Weiss versions of both our Theramed and Denivit was a decline in the return on capital employed (ROCE) brands. to 14.0 percent. In the hair salon business, our activities mainly cen- tered on our colorants portfolio. We have regularly up- Market segments dated our top brand Igora and extended it through the The Cosmetics/Toiletries business sector is active in introduction of further fashionable colors and shades. the segments hair cosmetics, body care, skin care, With Igora Vibrance, we hit the market with a new oral care and in the hair salon business. intensive colorant in 40 brilliant shades. The premi- In keeping with our strategic alignment, we fo- um hair care brand SEAH Hairspa continued to show cused particularly on developing our hair cosmetics encouraging development. As a result of our takeover business. Our colorants were strengthened through of Indola, we have expanded our activities within this the addition of new and revamped products. Palette market and entered the wholesale segment. and Live Color performed particularly well. We were especially successful with our launch of the styling Capital expenditures and efficiency Management report brand got2b, from the US American ARL range, in enhancement programs Germany and Austria. Taft took over the position as Our investments for 2004 focused on Europe. By im- market leader in Europe and was extended by the in- plementing restructuring measures, we have also suc- novative Silk Flex line. In order to strengthen our ceeded in reducing costs and streamlining both our market position in the hair care business, we expand- organization and our processes. Optimization of our ed our portfolio with Gliss Styling Shining Blonde and production facilities and operational structures like- a range of Gliss Aroma products. wise contributed to an increase in profitability. In- The body care business with the Fa brand also suf- cluding acquisitions, capital expenditures for the fered in 2004 from the persistently difficult market year totaled 1,365 million euros compared to 57 mil- situation prevailing in Europe. Dial was able to con- lion euros in 2003. Cosmetics/ Toiletries solidate its position in the North American personal care market and expand its share of the growing show- Outlook er gel segment. According to our estimates, the world cosmetics mar- In the skin care business, Diadermine continued its ket is likely to grow by 2.5 percent in 2005. While we successful performance of previous years within Eur- expect particularly good growth to occur in Asia, North ope, aided in particular by the launch of the new series America and Eastern Europe, our forecast for Western Diadermine Body Perfect in Germany, France and Europe is for no improvement over the previous year. Benelux. With Pur Balance, we successfully launched For 2005 we expect that we will achieve an organ- a care line under the umbrella of our local Aok brand, ic growth rate above that of the world cosmetics mar- specifically designed for young skin in the 20-plus de- ket. We expect operating profit after adjusting for for- mographic. eign exchange to increase in the double-digit percent- In the oral care business, overall performance was age range.1) stable. We responded to the sustained trend toward 1) see footnote 1 on page 51

Henkel Annual Report 2004 43 Management report: Consumer and Craftsmen Adhesives

Consumer and Craftsmen Adhesives

Organic sales growth 5.4 percent Operating profit up 6.1 percent ROCE at 19.3 percent World market leadership expanded

Key financials1) in million euros 2003 2004 Change Sales in million euros Sales 1,313 1,446 10.1 % Proportion of Group sales 14 % 14 % 0 pp 1,446 EBITA 158 169 6.9 % 1,290 1,275 1,317 1,313 Return on sales (EBITA) 12.0 % 11.7 % – 0.3 pp EBIT 141 150 6.1 % Return on sales (EBIT) 10.8 % 10.4 % – 0.4 pp Return on capital employed (ROCE) 20.7 % 19.3 % – 1.4 pp EVA® 66 73 9.3 %

2000 2001 2002 2003 2004 pp = percentage points 1) calculated on the basis of units of 1,000 euros

Economic environment and market position Sales and profits There was little change compared with previous years Sales rose by 10.1 percent to 1,446 million euros. After in the dynamics of the markets in which the Con- adjusting for foreign exchange, the increase amount- sumer and Craftsmen Adhesives business sector oper- ed to 13.8 percent. This improvement was due not only ates. The environment continues to be characterized to sales by our acquisitions but also to a rate of organ- by a large number of small suppliers with only limit- ic growth that was well above market levels. ed portfolio breadth and depth. Once again, the growth Despite persistent economic difficulties in Ger- rates exhibited by the various regions and market seg- many, sales in the consumer-driven segments remained ments revealed a mixed picture. In the regional break- constant, albeit with a decline in the building adhe- down, Eastern Europe and the Asian markets showed sives business. Among the traditional core European the highest growth rates. In terms of product groups, countries, the UK exhibited the highest growth rate. sealants, modern adhesive types such as assembly ad- Our very encouraging business performance in Eastern hesives and construction chemical products for heat insulation and moisture protection showed the high- Sales development est growth rates. Despite the weakness of the market 2004 in Germany and in several other European countries, Change versus previous year 10.1 % there was a significant worldwide increase in con- Foreign exchange – 3.7 % struction-related adhesive and sealant applications. At constant exchange rates 13.8 % The Consumer and Craftsmen Adhesives business of which organic 5.4 % sector is number one in the world in this market, which acquisitions/divestments 8.4 % exhibits annual growth rates of a good 2 percent.

44 Henkel Annual Report 2004 Management report: Consumer and Craftsmen Adhesives

Europe was partly due to an upturn in the important Pattex brand. The sealants business again exhibited Polish market following a poor prior year. dynamic development, with the successfully integrat- Growth in Latin America and Asia-Pacific was ed acquisitions Makroflex and Lucky Silicone con- primarily acquisition-related. North America meas- tributing and additionally strengthening Henkel’s ured in local currency was again highly successful. standing as a global supplier in this segment. Against the background of raw material price Our worldwide performance in the building adhe- increases that we have not yet been able to fully off- sives segment was again very good, with our continued set, growth in operating profit (EBIT) was below av- expansion in Eastern Europe a major contributor in erage at 6.1 percent, or 9.3 percent after adjusting this regard. In Mexico, we are utilizing our acquisi- for foreign exchange. The return on sales (EBIT) de- tion of Fester, the leading brand for moisture barrier clined to 10.4 percent and the return on capital em- products, to expand our business, adding further ployed (ROCE) fell from 20.7 percent to 19.3 percent. Henkel products to the portfolio and developing new local markets. Market segments

The Consumer and Craftsmen Adhesives business sec- Capital expenditures and efficiency Management report tor is active in three market segments: adhesives and enhancement programs adhesive tapes for the home, school and office; adhe- We are adapting our production capacities to a growing sives and sealants for craftsmen and DIY; and build- demand for our products. We have improved the competing adhesives. itiveness of our manufacturing sites through numer- Having in 2003 successfully launched the first ous initiatives. We are also supporting business expan- solvent-free all-purpose adhesive in stick form under sion in Eastern Europe through additional local produc- the Power Pritt brand for the market segment adhesives tion capacities. Overall, capital expenditures including and adhesive tapes for home, school and office, a further all- acquisitions for 2004 totaled 114 million euros com- purpose adhesive in gel form was added to the range pared to 138 million euros in 2003. in 2004 – under the name Power Pritt Gel. Following the worldwide launch of S.O.S. Repair within the Outlook cyanoacrylates product group, marketed internation- We expect a market growth rate of 2 percent in 2005. ally under the Loctite brand, we are now addressing Developments in the markets for raw materials new target groups and fields of application. In the and packaging products will have an effect on our

adhesive tapes business, our focus in North America business performance: aside from further price in- Consumer and Craftsmen Adhesives is primarily on the Duck brand. The strategy of utiliz- creases, certain major raw materials may also be in ing strong Henkel brands such as Pritt and Pattex for short supply. We have initiated measures to secure adhesive tapes has improved our position in this mar- both our material supplies and our profitability. ket segment within Europe. We expect organic sales to increase significantly There were also improvements in the market po- faster than the market. And we expect operating prof- sitions of our high-performance adhesives. Within the it after adjusting for foreign exchange to increase in market segment adhesives and sealants for DIY and crafts- the double-digit percentage range.1) men, these are managed internationally under the 1) see footnote 1 on page 51

Henkel Annual Report 2004 45 Management report: Henkel Technologies

Henkel Technologies

Organic sales growth 7.7 percent Operating profit up 21.5 percent ROCE increased to 13.2 percent Further consolidation of position as world market leader

Key financials1) in million euros 2003 2004 Change Sales in million euros Sales 2,666 2,791 4.7 % Proportion of Group sales 28 % 26 % – 2 pp 2,828 2,791 2,679 2,763 2,666 EBITA 260 299 14.8 % Return on sales (EBITA) 9.8 % 10.7 % 0.9 pp EBIT 194 235 21.5 % Return on sales (EBIT) 7.3 % 8.4 % 1.1 pp Return on capital employed (ROCE) 11.3 % 13.2 % 1.9 pp EVA® –17 49 –

2000 2001 2002 2003 2004 pp = percentage points 1) calculated on the basis of units of 1,000 euros

Economic environment and market position Sales and profits The Henkel Technologies business sector is made up At 2,791 million euros, Henkel Technologies sales ex- of our industrial activities in the areas of adhesives, ceeded prior year by 4.7 percent. After adjusting for sealants and surface treatment. The underlying glob- foreign exchange, sales rose by 8.8 percent. Aside from al conditions in which Henkel Technologies operates the growth regions Asia-Pacific and Eastern Europe, improved in 2004. Against the background of a world where the results achieved were well above average, market growth rate of around 3 percent, we succeed- our businesses in Germany, the rest of Western Eur- ed in achieving a significantly higher increase in cer- ope and Latin America also performed well. tain market segments, and particularly in the elec- While sales in North America increased slightly tronics and steel industries. The trend away from me- after adjusting for foreign exchange, a decrease in de- chanical joining techniques and toward adhesives mand in the automotive sector, one of our core busi- and sealing technologies continued unabated. ness areas in the USA, somewhat dampened results. Henkel Technologies is the world market leader in the segments of relevance to us. In regional terms, we Sales development are focusing on Europe, North America and the Asia- 2004 Pacific region. The takeover of Sovereign and Orbseal Change versus previous year 4.7 % produced an encouraging improvement in our market Foreign exchange – 4.1 % position in the USA, particularly in the automotive, At constant exchange rates 8.8 % paper converting and packaging industries. of which organic 7.7 % acquisitions/divestments 1.1 %

46 Henkel Annual Report 2004 facture ofhybrid andcomposite materials. manu- suitablefor areparticularly the that sive films epoxy form ofpastes resinproductsinthe andadhe- USA. For the pensated for level alesssatisfactory ofactivityinthe to adouble-digitpercentage rate. growth Thiscom- regionandLatinAmerica,giving rise Asia-Pacific the industry tive the with Our globalbusinessinpartnership Market segments to 13.2 percent. oncapitalemployed return and the (ROCE) increased onsales(EBIT)roseby 1.1return pointsto 8.4percent, exchange, increaseamounted the to 27.7 percent.The cent to adjusting 235millioneuros.After for foreign (EBIT)roseby 21.5cost operating structures, profit per- ourpositive andimprovedWith salesperformance tions by improving ourmarket the sharesthrough tor. Nevertheless, we were able to meetourexpecta- foodstagnation, andbeverage inthe particularly sec- for ourP3cleaningproducts. boosted leadingalsoto growth, anincreaseindemand wide demandfor entertainment electronicsfurther Thestrong world-ing andpre-treatmentofsurfaces. sives clean- andsealantsfromourproductsfor the ited fromourcompetence both inrelationto adhe- to anumberofnew segmentwe contracts. Inthis prof- of a result. in the ofsuccess. agooddegree troduced with free solderingpastes andalliedtechnologies were in- and printed Lead- anupturn. circuitboards, underwent manufactureofsemiconductors the and particularly consumer durables Our activitiesinrelationto the The Our wide-ranging portfolio manufacture for the We encountered increaseindemand anenormous steel industry steel consumer goods profited fromstrong demandinEurope, profited aerospace industry , achieving strong insalesas growth such ashouseholdappliancesled market wascharacterized by we have developed new electronics industry automo- , centage range. foreign exchange to double-digitper- increaseinthe 2005. We adjusting after for expectoperating profit icantly market outstrip expansionofthe asawholein while alsooptimizingourformulations. As aconsequence, we intend to increaseourprices in 2005. We expectourmarkets to grow by around3percent Outlook lion euros(previous year: 94millioneuros). yearditures inthe underreview amounted to 179 mil- consolidatedcluding the acquisitions, capitalexpen- ed greatly to improvement the In- inoperating profit. contribut- activities,and these ourrestructuring with economiesofscale.Weleading to further continued electronicsandpackagingindustries. in the closer proximity to customers operating, for example, regionto inthis manufactureourproductsin sary production capacitiesinAsia.Ithasbecomeneces- Investments in2004were geared to developing our enhancement programs Capital expenditures andefficiency applications andsystem solutions. ing new customers andleadingto additionalproduct new Loctite stick adhesive successful,reach- wasvery our corebrand Loctite. launchofthe InEurope,the USAparticularly,the we gained market shareswith repair andoverhaul maintenance, industrial ued to well. perform packagingmaterials contin- manufacture offlexible and labelingapplications.Ourproductsusedinthe launch ofanew generation ofhotmeltsfor packaging 1) see footnote1onpage51 We expect ourorganic rate salesgrowth to signif- We expectpriceincreasesinourraw materials. We have alsogenerally improved ourproductivity We increase insalesthe recorded asignificant 1) Management report: HenkelTechnologies Henkel Annual Report2004 segment. In 47

Henkel Management Technologies report Management report

Risk management addition, the risk management activities implemented within each function must also be detailed. The as- Integrated risk management sessment results are then compiled within the frame- and control system work of a compendium risk inventory that serves as a The ability to identify risks at an early stage and to con- basis for deciding upon further measures for the avoid- trol them efficiently is an integral part of our value- ance, reduction and elimination of risk, and for eval- based management approach. On the basis of unified uating the success of counter-measures implemented. corporate standards, we systematically incorporate and The efficiency of these measures and also the de- assess risks and opportunities in our planning and development of inventorized risks are additionally ana- cision-making processes. This enables us both to min- lyzed on a regular basis by a separate risk control pro- imize potential exposure at an early stage and to speci- cess at both a decentralized and a centralized level. fically target and effectively exploit identified oppor- This enables the quality of detection and control of tunities. Our risk management system is an integral risks to be continuously improved. All the processes component of the comprehensive planning, control incorporated within the risk management and control and reporting regime that we have implemented in regime are supported by an intranet-based risk data- the individual companies, in our business sectors and base that ensures transparent risk communication in our corporate units. The principles, processes and within the Company as a whole. responsibilities relating to risk management are defined in a Corporate Standard that is binding through- Operating risk structure out the Group. Regular reviews of the system includ- Risks to the development and performance of the op- ing its subsystems by both the Internal Audit depart- erating business sectors arising from the macro-eco- ment and external auditors ensure compliance with nomic environment and regional variations in market specified procedures while also supporting the ongo- trends are identified on the basis of predictions pertain- ing process of further development. Within the frame- ing to underlying cyclical conditions. work of the 2004 financial audit, the auditors also duly Risks in the field of production are minimized by examined the structure and function of our risk man- production site decentralization, defined safety stan- agement system and raised no objections. dards, the high qualification of our employees and Risk inventories are periodically instigated as an regular maintenance of facilities. The negative effects important basis for controlling the overall level of ex- of possible production failures are covered by insur- posure. The purpose of this activity is to systematical- ance policies to the extent that this is economically ly identify, appraise, monitor and document all major feasible. The high flexibility of our sites in regard to risks. The duty of the globally responsible business and our product portfolio also contributes to a reduction function managers to recognize, communicate and re- in our level of exposure. port risks is governed by precisely defined thresholds. We minimize research and technology risks by Involvement of the regional managers in the report- operating a complex system of in-house fundamental ing process ensures that risks in our international or- research augmented by extensive information inter- ganization are comprehensively monitored and record- change with universities and research institutions. De- ed. Within the framework of a risk inventory, mana- tailed analytical methods and strict product release gerial staff are required to identify risks on the basis procedures are applied in order to ensure defect-free of checklists using predefined operating and func- product composition. The high quality of our products tional risk categories, and to evaluate the results in is also underpinned by our uniform worldwide safety terms of occurrence likelihood and potential loss. In and environmental standards.

48 Henkel Annual Report 2004 foreseen fluctuations inraw material prices. Weforeseen fluctuations also wepackaging sothat canrespondeffectively to un- assiduously onalternative formulations andforms of dors registered according to ISOstandards. We work wethat require. Moreover, we give preference to ven- better availability goodsandservices securethe ofthe main independentofindividualsuppliersinorder to tribute considerably to reducingrisk.We strive to re- sion ofourpurchasingmanagement capabilitycon- our vendor portfolio andongoing worldwide expan- inourCorporate Standards.cedures specified pro- decisions areconducted the inaccordance with paration, implementation andcontrolofacquisition by ourown and external specialists. experts Thepre- due diligence backed upby legal adviceprovided both we baseour decisionsonacomprehensive processof environment.Toital market andthe combatthese, ing to tax,competition, patents, cap- monopolies,the can arisedueto laws relat- instruments andstatutory hensive riskanalysis. Incomplex transactions, risks decisions arelikewise taken basisofacompre- onthe caseofcapitalexpenditures,acquisitionplied inthe rate relevant specialist functions. allthe sibility matrixes andapproval incorpo- processesthat differentiated respon- decisions isalignedto defined, tion, implementation andmonitoring ofinvestment ect controlandriskreductioncapability. Theprepara- ment projectsprovide basisfor oureffective the proj- feasibility studies to viabilityofinvest- determine the a detailedriskappraisal. Carefuladvancedtesting and duces ourexposureto productliabilitylitigation. launch ofnew productsanditalsosubstantially re- risk ofanunsuccessful limitthe us to significantly andmarketlaboratory testing. Thisapproachenables agement system andcarefully conceived andapplied we deploy regard areaprofessional inthis ideasman- majorplanning process.Amongthe that instruments basis ofcomprehensive market researchandadetailed We introducenew productsinto circulationonthe In the procurementmarket, pro-activeIn the controlof proceduresimilarto ap- Through astructured that basisof Capital expendituresareanalyzed onthe duce both risks simultaneously. risks duce both terest swapsareusedto rate crosscurrency re- risks, ex almost interestment ofthe rate swapsmatch bonds measurement ofthe ship, the in aformally documented hedge accountingrelation- rate bondsandinterest swaps.Asthe rate swapsare usinginterestwere converted to fromfixed floating TheDialCorporation acquisition the of assumed with bondfor 0.2billionUSdollars in June2003andonthe bond for 1billioneurosissuedbyon the Henkel KGaA primarily interest rate swaps.The interest rate both liquidity;affecting 2.by usinginterest rate derivatives, liabilities assetsandfinancial originalfinancial the 1. by selectingequivalent fixed-interest periodsfor positionsismanaged ontwobearing financial levels: To achieve ofinterest- ourmaturitystructure this, management ofinterest ofprudent that rate exposure. important policyis other objective ofourfinancial foreign entitiesarehedged only inindividualcases. fromnetinvestments Translation risks action risks. in rivatives primarily to hedge against exposureto trans- ed into Groupcurrency. the Henkel de- usescurrency nancial statements offoreign subsidiariesaretranslat- localindividualcompanycome apparentwhenthe fi- exchange rates. translation riskbe- ofthe Theeffects dueto equity movementsloss onthe ofasubsidiary in riskofanaccountingtranslationtranslation riskisthe individual company statements. Currency financial inrelationto term futureforeign cashflows currency valueofshort- causingchanges inthe rate fluctuations ing purposes.Transaction riskarisesfromexchange areutilizedexclusivelynancial instruments for hedg- governed by corporate-wide guidelines.Derivative fi- Group,operatingto onapro-active the affect basis ages interest rate, andliquidity likely currency risks centrally department The Corporate man- Treasury Functional riskstructure ket by concludinglong-term supply agreements. procurementmar- inthe risks limit pricefluctuation In additionto separate hedges andin- of currency an- fromhedgingagainstApart risks, currency Henkel Annual Report2004 Management report and the measure- and the actly. 49

Management report Management report

The clear regulations governing our response to finan- nities combined with performance-related compensa- cial risk form an essential component of the financial tion plans form the basis of our personnel development strategy in place at Henkel. Our objective is to recon- system. cile as far as possible the competing requirements of profitability, liquidity, safety and financial independ- Overall risk ence while seeking to satisfy the externally defined The measures described for managing the various cat- adequacy criteria of the capital market. The underly- egories of operating and functional risk ensure that ing Treasury Standards and also the systems applied all the relevant price fluctuation, production failure in risk management and control are explained in the and liquidity risks and risks arising from cash flow Notes to the Financial Statements. fluctuations to which the Group may be exposed, are Standardized procedures, a pro-active approach effectively combated. At the moment, there are no to receivables management and a detailed customer identifiable risks relating to future developments relationship monitoring system minimize the occur- that could endanger the existence either of the hold- rence of bad debts. ing company or of the Group as a going concern. Our We employ advanced technologies in order to risk analysis indicates that the net assets, financial avoid risks in the field of electronic data processing. position and also the results of operations of the hold- Unauthorized access to data and systems and also ing company and of the Group as a whole are not cur- major data losses are extensively precluded by contin- rently endangered either by individual risks or by the uous monitoring of the efficiency, availability and re- aggregated exposure arising from all risks combined. liability of our systems, and by a detailed emergency response plan integrated within our security concept. There are currently no risks arising from litiga- tions either pending or threatened that could have a material influence on our financial position. We ad- dress litigation risk by maintaining constant contacts between the corporate legal department, local national companies and local attorneys. Through our reporting system we are able both to monitor and control current legal proceedings and also to assess potential risks. We have concluded worldwide insurance policies, the scope of which is constantly being centrally opti- mized, in order to cover any remaining liability risks and potential losses that could affect the Company. The future economic development of Henkel is essentially secured by the commitment and capabilities of our employees. We combat the increasing competition for well-qualified technical and managerial staff by maintaining close contacts with selected universities and implementing special recruitment programs. Attractive qualification and further training opportu-

50 Henkel Annual Report 2004 2) 1) to continueto show sector. strong demandinthis isexpected Chinaparticularly path. upward growth stream productssuchassurface-mounted devices (SMD). caseofup- inthe occurring ofgrowth small degree slower will besignificantly only a in2005,with ry are again likely inAsiaandLatinAmerica. America.Strong EuropeandNorth increases in both automotive below-averagethe with industry growth previous year.the USAtoin the increase,albeitataslower rate in than likely to beminor. We expectconsumerconsumption Any revival ofconsumerconsumption in Europeis Sector developments Latin America. highest rates growth the that willoccurinAsiaand is likely to beslower USA.We inthe than anticipate Germany andinEurope asawhole within of growth nomy to grow by around3percentin2005.Therate future developments. and highoilpricescouldhave adampen in2004.Apersistentlypronounced than weak USdollar USA,JapanandChinatocountries suchasthe beless 2005. We major dynamicsofcertain growth expectthe ties areunlikely to change undergoany in significant The world economicconditionsunderlying ouractivi- World economy Opportunities andthreats Underlying economicconditions: Outlook fortheHenkelGroup zation andexceptionalitems. Taken perpreferred onthebasisofearnings share before goodwillamorti- increase duetotheabsenceofscheduledgoodwill amortization. It shouldbenotedthattheEBITfigure will,witheffect from January1,2005, The steel willcontinueits andmetalsindustry We electronicsindust- expansioninthe expectthat We anticipate aslightincrease inproduction weAgainst world background, expectthe this eco- ing effect on ing effect acquisitions/divestments) of3to 4percentin2005. adjustingganic (after for growth foreign exchange and tive markets. TheHenkel Groupexpectsto achieve or- Our intention isto grow morestrongly ourrespec- than Sales andprofits forecast for2005 increaseinactivity.undergo afurther USAtoWe inthe industry construction expectthe of any inbuildingactivityGermany. realupturn sector. Europeanconstruction the Thereisstill nosign ofgrowth. dergo asmalldegree We general again expectthe industrial sector to un- site inReims. intention to shutdown ourdetergents production Group acquired onDecember27, 2004. ures inrelationto selected companies Sovereign ofthe 2005,we meas- announcedrestructuring In January Post-closure report expected to previous match year. ratios ofthe the researchanddevelopmentment, andthe ratio canbe USdollardoesnotdepreciate the excessively.ing that to highlevel previous year, remainatthe ofthe assum- absent, we perpreferred share(EPS) expectearnings centage range adjusting after for foreign exchange. items to highteens undergoanincreaseinthe per- al We (EBIT) expectoperating profit We in anticipate sluggishgrowth nomorethan In the middle of January 2005we announcedour middle ofJanuary In the The investment ratio inproperty, plantandequip- With incomefromourinvestmentWith inClorox now Henkel Annual Report2004 1) Management report before exception- 51 2)

Management report Consolidated financial statements

Henkel Group: Consolidated Statement of Income in million euros Notes 2003 2004 Sales 1 9,436 10,592 Cost of sales 2 – 4,965 – 5,615 Gross profit 4,471 4,977 Marketing, selling and distribution costs 3 – 2,915 – 3,156 Research and development costs 4 – 257 – 272 Administrative expenses 5 – 508 – 570 Other operating income 6 158 146 Other operating charges 7 –77 –103 Scheduled amortization of goodwill 8 –125 – 200 Current restructuring costs 9 –37 –22 Operating profit (EBIT) before exceptional items 10 710 800 Sale of participation in Wella 81 – Extended/Advanced Restructuring costs –85 – 408 Gain arising on the exchange of the investment in Clorox – 1,770 Impairment losses on goodwill – – 242 Operating profit (EBIT) after exceptional items 706 1,920 Net income from associated companies 174 162 Income from Clorox share buy-back 30 – Net result from other participations – 2 2 Net interest expense –140 –163 Financial items 11 62 1 Earnings before tax 768 1,921 Taxes on income 12 – 238 –185 Net earnings 530 1,736 Minority interests 13 –11 –1 Earnings after minority interests 519 1,735 Allocation to revenue reserves – 352 –1,550 Unappropriated profit 167 185

Earnings per share (basic) in euros Notes 2003 2004 Ordinary shares 41 3.59 12.07 Non-voting preferred shares 41 3.65 12.13

Earnings per share (diluted) in euros Notes 2003 2004 Ordinary shares 41 3.59 12.07 Non-voting preferred shares 41 3.65 12.10

Earnings per share before exceptional items1) in euros Notes 2003 2004 Ordinary shares 41 3.41 3.76 Non-voting preferred shares 41 3.47 3.82 1) exceptional items 2003: sale of participation in Wella, Extended Restructuring measures, Clorox share buy-back exceptional items 2004: exchange of investment in Clorox, impairment losses on goodwill, Advanced Restructuring measures

52 Henkel Annual Report 2004 Consolidated financial statements

Henkel Group: Consolidated Balance Sheet

Assets in million euros Notes Dec. 31, 2003 Dec. 31, 2004 Intangible assets 14 1,641 4,554 Property, plant and equipment 15 1,683 1,808 Shares in associated companies 716 463 Other investments 145 442 Long-term loans 538 133 Financial assets 16 1,399 1,038 Fixed assets 4,723 7,400 Inventories 17 1,053 1,196 Trade accounts receivable 18 1,581 1,743 Other receivables and miscellaneous assets 19 521 777 Liquid funds/Marketable securities 20 1,188 1,695 Current assets 4,343 5,411 Deferred tax assets 21 296 327 Total assets 9,362 13,138

Shareholders’ Equity and Liabilities in million euros Notes Dec. 31, 2003 Dec. 31, 2004 Subscribed capital 22 374 374 Capital reserve 23 652 652 Revenue reserves 24 2,788 4,359 Unappropriated profit 167 185 Gains and losses recognized in equity 25 – 670 – 982 Equity excluding minority interests 3,311 4,588 Minority interests 26 75 16 Equity including minority interests 3,386 4,604 Provisions for pensions and other post-employment benefits 27 1,642 1,815 Other provisions 28 1,056 1,513 Provisions for deferred tax liabilities 29 181 455 Provisions 2,879 3,783 Borrowings 30 1,855 3,174 Trade accounts payable 31 789 1,099 Other liabilities 32 453 478 Liabilities 3,097 4,751 Total equity and liabilities 9,362 13,138 Consolidated financial statements

Henkel Annual Report 2004 53 Consolidated financial statements

Henkel Group: Statement of Changes in Equity see Notes 22 to 25 in million euros Gains and losses recognized in equity Unappro- Transla- Derivative Ordinary Preferred Capital Revenue priated tion dif- financial in- shares shares reserve reserves profit ferences struments Total At January 1, 2003 222 152 652 2,510 156 – 405 –8 3,279 Distributions – –156 – – –156 Earnings after minority interests – 519 – – 519 Allocations to reserves 352 – 352 – – – Foreign exchange effects – – – 268 – – 268 Derivative financial instruments – – – 11 11 Other changes taken to equity – 74 – – – –74 At Dec. 31, 2003/Jan. 1, 2004 222 152 652 2,788 167 – 673 3 3,311 Distributions –167 –167 Earnings after minority interests 1,735 1,735 Allocations to reserves 1,550 –1,550 Foreign exchange effects – 322 – 322 Derivative financial instruments 10 10 Other changes taken to equity 21 21 At December 31, 2004 222 152 652 4,359 185 – 995 13 4,588

Key financial ratios 2003 2004 Interest coverage ratio (EBITDA ÷ net interest expense including interest element of pension provisions) 7.9 17.0 Debt coverage ratio in % (net earnings before minority interests + amortization and depreciation + interest element of pension provisions ÷ net borrowings and pension provisions) 44.8 81.6 Equity ratio in % (equity including minority interests and unappropriated profit ÷ total assets) 36.2 35.0 Gearing (net borrowings and pension provisions ÷ equity) 0.68 0.72

54 Henkel Annual Report 2004 Consolidated financial statements

Henkel Group: Cash Flow Statement see Note 42 in million euros 2003 2004 Operating profit (EBIT) after exceptional items 706 1,920 Income taxes paid – 348 – 276 Depreciation/write-ups of fixed assets (excluding financial assets, including exceptional items) 405 851 Net gains/losses from disposals of fixed assets (excluding financial assets, including exceptional items) –102 –1,785 Change in inventories –23 1 Change in receivables and miscellaneous assets –102 –50 Change in liabilities and provisions –16 262 Cash flow from operating activities 520 923 Capital expenditures on intangible assets –25 –26 Capital expenditures on property, plant and equipment – 321 – 344 Capital expenditures on financial assets/acquisitions – 499 – 3,420 Proceeds from disposals of fixed assets 482 2,763 Cash flow from investing activities/acquisitions – 363 –1,027 Henkel KGaA dividends –156 –167 Subsidiary company dividends (to other shareholders) –9 –12 Interest and dividends received 110 123 Interest paid –186 – 215 Dividends and interest paid and received – 241 – 271 Change in borrowings 1,056 1,039 Other financing transactions – 1 – 7 Cash flow from financing activities 814 761 Change in cash and cash equivalents 971 657 Effect of exchange rate changes on cash and cash equivalents –9 –150 Change in liquid funds and marketable securities 962 507 Liquid funds and marketable securities at January 1 226 1,188 Liquid funds and marketable securities at December 31 1,188 1,695

Computation of free cash flow in million euros 2003 2004 Cash flow from operating activities 520 923 Capital expenditures on intangible assets –25 –26 Capital expenditures on property, plant and equipment – 321 – 344 Proceeds from disposal of fixed assets 482 2,763 Dividends received/Net interest –76 –92 Free cash flow 5801) 3,2242)

1) excluding the tax payments in respect of Cognis and the Wella disposal proceeds, the free cash flow figure would have amounted to 369 million euros 2) excluding the proceeds from the exchange of the investment in Clorox and the repayment of the Cognis loan (vendor note), the free cash flow figure would have amounted to 529 million euros Consolidated financial statements

Henkel Annual Report 2004 55 Notes to the financial statements

Notes to the Financial Statements Henkel Group: Segment Information1) see Note 40 in million euros Laundry & Henkel Home Cosmetics/ Consumer Tech- Business Sectors Care Toiletries Adhesives nologies Corporate Group Sales 2004 3,617 2,477 1,446 2,791 261 10,592 Change from previous year 17.7 % 18.7 % 10.1 % 4.7 % – 12.3 % Proportion of Group sales 34 % 23 % 14 % 26 % 3 % 100 % Sales 2003 3,074 2,086 1,313 2,666 297 9,436 EBITDA 2004 after exceptional items 477 348 208 383 1,355 2,771 EBITDA 2003 384 272 193 351 –89 1,111 Change from previous year 24.2 % 28.1 % 7.7 % 9.1 % – > 100 % Return on sales (EBITDA) 2004 13.2 % 14.0 % 14.4 % 13.7 % – 26.2 % Return on sales (EBITDA) 2003 12.5 % 13.0 % 14.7 % 13.2 % – 11.8 % Amortization and depreciation of trademark rights, other rights and property, plant and equipment 2004 126 57 39 84 103 409 Amortization and depreciation of trademark rights, other rights and property, plant and equipment 2003 89 44 35 91 21 280 EBITA 2004 after exceptional items 351 291 169 299 1,252 2,362 EBITA 2003 295 228 158 260 –110 831 Change from previous year 19.2 % 27.5 % 6.9 % 14.8 % – > 100 % Return on sales (EBITA) 2004 9.7 % 11.7 % 11.7 % 10.7 % – 22.3 % Return on sales (EBITA) 2003 9.6 % 10.9 % 12.0 % 9.8 % – 8.8 % Amortization of goodwill 2004 51 66 19 64 2426) 442 Amortization of goodwill 2003 8 34 17 66 – 125 EBIT 2004 after exceptional items 300 225 150 235 1,0105) 1,920 EBIT 2003 287 194 141 194 –1104) 706 Change from previous year 4.7 % 16.2 % 6.1 % 21.5 % – > 100 % Return on sales (EBIT) 2004 8.3 % 9.1 % 10.4 % 8.4 % – 18.1 % Return on sales (EBIT) 2003 9.3 % 9.3 % 10.8 % 7.3 % – 7.5 % Return on capital employed (ROCE) 2004 14.9 % 14.0 % 19.3 % 13.2 % – 30.9 % Return on capital employed (ROCE) 2003 33.1 % 22.6 % 20.7 % 11.3 % – 16.2 % Capital employed 20042) 2,364 2,072 876 2,266 63 7,641 Capital employed 20032) 891 1,008 764 2,306 147 5,116 Change from previous year > 100 % > 100 % 14.7 % –1.7 % – 49.3 % Capital expenditures (excl. financial assets) 2004 2,609 1,365 114 179 31 4,298 Capital expenditures (excl. financial assets) 2003 210 57 138 94 18 517 Operating assets 2004 3,204 2,415 1,064 2,489 355 9,527 Operating liabilities 2004 896 656 294 626 292 2,764 Net operating assets employed 20043) 2,308 1,759 770 1,863 63 6,763 Operating assets 2003 1,689 1,338 939 2,571 381 6,918 Operating liabilities 2003 822 571 276 610 233 2,512 Net operating assets employed 20033) 867 767 663 1,961 148 4,406 Research and development costs (R&D) 2004 74 42 21 101 34 272 R&D as % of sales 2004 2.1 % 1.7 % 1.5 % 3.6 % – 2.6 % Research and development costs (R&D) 2003 64 35 18 103 37 257 R&D as % of sales 2003 2.1 % 1.7 % 1.4 % 3.8 % – 2.7 % 1) calculated on the basis of units of 1,000 euros 2) including goodwill at cost 3) including goodwill at residual book values 4) includes Extended Restructuring costs of 85 million euros, of which 22 million euros relates to Laundry & Home Care, 18 million euros to Cosmetics/Toiletries, 10 million euros to Consumer and Craftsmen Adhesives, 24 million euros to Henkel Technologies and 11 million euros to Corporate 5) includes Advanced Restructuring costs of 408 million euros, of which 128 million euros relates to Laundry & Home Care, 83 million euros to Cosmetics/Toiletries, 46 million euros to Consumer and Craftsmen Adhesives, 114 million euros to Henkel Technologies and 37 million euros to Corporate 6) impairment losses on goodwill: Laundry & Home Care 58 million euros, Cosmetics/Toiletries 31 million euros, Consumer and Craftsmen Adhesives 5 million euros, Henkel Technologies 148 million euros

56 Henkel Annual Report 2004 Notes to the financial statements

Notes to the Financial Statements Henkel Group: Segment Information1) see Note 40 in million euros Europe/ North Africa/ America Middle (USA, Latin Asia/ Regions East Canada) America Pacific Corporate Group Sales by location of company 2004 7,085 2,000 471 775 261 10,592 Change from previous year 2.1 % 76.5 % 27.5 % 10.9 % – 12.3 % Proportion of Group sales 67 % 19 % 4 % 7 % 3 % 100 % Sales by location of company 2003 6,938 1,133 370 698 297 9,436 Sales by location of customer 2004 7,269 1,705 489 868 261 10,592 Change from previous year 6.1 % 54.9 % 28.1 % 8.1 % – 12.3 % Proportion of Group sales 68 % 16 % 5 % 8 % 3 % 100 % Sales by location of customer 2003 6,853 1,101 382 803 297 9,436 EBITDA 2004 after exceptional items 1,020 310 32 54 1,355 2,771 EBITDA 2003 1,017 131 21 31 –89 1,111 Change from previous year 0.3 % > 100 % 51.3 % 71.6 % – > 100 % Return on sales (EBITDA) 2004 14.4 % 15.5 % 6.7 % 7.0 % – 26.2 % Return on sales (EBITDA) 2003 14.7 % 11.5 % 5.7 % 4.5 % – 11.8 % Amortization and depreciation of trademark rights, other rights and property, plant and equipment 2004 210 68 14 14 103 409 Amortization and depreciation of trademark rights, other rights and property, plant and equipment 2003 201 33 13 12 21 280 EBITA 2004 after exceptional items 810 242 18 40 1,252 2,362 EBITA 2003 816 98 8 19 –110 831 Change from previous year – 0.8 % > 100 % > 100 % > 100 % – > 100 % Return on sales (EBITA) 2004 11.4 % 12.1 % 3.8 % 5.2 % – 22.3 % Return on sales (EBITA) 2003 11.8 % 8.7 % 2.1 % 2.7 % – 8.8 % Amortization of goodwill 2004 77 107 5 11 2426) 442 Amortization of goodwill 2003 74 35 5 11 – 125 EBIT 2004 after exceptional items 733 135 13 29 1,0105) 1,920 EBIT 2003 742 63 3 8 –1104) 706 Change from previous year –1.1 % > 100 % > 100 % > 100 % – > 100 % Return on sales (EBIT) 2004 10.4 % 6.8 % 2.8 % 3.7 % – 18.1 % Return on sales (EBIT) 2003 10.7 % 5.6 % 0.7 % 1.1 % – 7.5 % Return on capital employed (ROCE) 2004 23.3 % 7.5 % 4.7 % 8.4 % – 30.9 % Return on capital employed (ROCE) 2003 25.1 % 10.2 % 2.4 % 4.4 % – 16.2 % Capital employed 20042) 3,473 3,241 384 480 63 7,641 Capital employed 20032) 3,246 960 336 427 147 5,116 Change from previous year 7.0 % > 100 % 14.2 % 12.6 % – 49.3 % Capital expenditures (excl. financial assets) 2004 369 3,682 47 169 31 4,298 Capital expenditures (excl. financial assets) 2003 355 27 90 27 18 517 Operating assets 2004 4,676 3,386 445 665 355 9,527 Operating liabilities 2004 1,797 358 78 239 292 2,764 Net operating assets employed 20043) 2,879 3,028 367 426 63 6,763 Operating assets 2003 4,507 1,037 387 606 381 6,918 Operating liabilities 2003 1,748 233 68 230 233 2,512 Net operating assets employed 20033) 2,759 804 319 376 148 4,406 1) calculated on the basis of units of 1,000 euros 2) including goodwill at cost 3) including goodwill at residual book values 4) includes Extended Restructuring costs of 85 million euros, of which 47 million euros relates to Europe/Africa/Middle East, 12 million euros to North America, 8 million euros to Latin America, 7 million euros to Asia-Pacific and 11 million euros to Corporate 5) includes Advanced Restructuring costs of 408 million euros, of which 282 million euros relates to Europe, 60 million euros to North America, 7 million euros to Latin America, 22 million euros to Asia-Pacific and 37 million euros to Corporate 6) impairment losses on goodwill: Europe 79 million euros, North America 115 million euros, Latin America 2 million euros, Asia/Pacific 46 million euros

Henkel Annual Report 2004 57 Notes to the financial statements Notes to the financial statements

Notes to the Financial Statements Henkel Group: Changes in Fixed Assets

Cost in million euros Property, Intangible plant and Financial assets equipment assets Total At January 1, 2003 2,982 4,701 1,442 9,125 Changes in the Group/acquisitions 141 31 4 176 Additions 25 321 472 818 Disposals –39 – 231 – 416 – 686 Reclassifications 5 – 5 – – Translation differences – 227 –178 –77 – 482 At Dec. 31, 2003/Jan. 1, 2004 2,887 4,639 1,425 8,951 Changes in the Group/acquisitions 3,726 187 –31 3,882 Additions 26 344 461 831 Disposals –43 – 210 – 806 –1,059 Reclassifications 2 –2 – – Translation differences – 387 –103 12 – 478 At December 31, 2004 6,211 4,855 1,061 12,127

Accumulated amortization/depreciation in million euros Property, Intangible plant and Financial assets equipment assets Total At January 1, 2003 1,196 2,984 18 4,198 Changes in the Group/acquisitions – 1 4 5 Write-ups – –9 – –9 Amortization and depreciation 158 256 6 420 Disposals –33 –191 –2 – 226 Reclassifications 5 –5 – – Translation differences –80 –80 – –160 At Dec. 31, 2003/Jan. 1, 2004 1,246 2,956 26 4,228 Changes in the Group/acquisitions – –13 – –13 Write-ups – –3 – –3 Amortization and depreciation 510 344 2 856 Disposals –43 –176 –5 – 224 Reclassifications 1 – 1 – – Translation differences –57 –60 – –117 At December 31, 2004 1,657 3,047 23 4,727

Fixed assets (net) at December 31, 2004 4,5541) 1,808 1,038 7,400 Fixed assets (net) at December 31, 2003 1,641 1,683 1,399 4,723 Scheduled amortization and depreciation 2004 268 252 – 520 Impairment losses 2004 242 92 2 336 Total amortization and depreciation 2004 510 344 2 856 Scheduled amortization and depreciation 2003 158 246 – 404 Impairment losses 2003 – 10 6 16 Total amortization and depreciation 2003 158 256 6 420

1) of which with indefinite useful lives 574 574

58 Henkel Annual Report 2004 Notes to the financial statements

Henkel Group: Notes to the Financial Statements

General information The consolidated financial statements of Henkel KGaA have been prepared in accordance with International Financial Reporting Standards (IFRS). IFRS 3 (Business Combinations) has been applied with effect from March 31, 2004 as well as the related revised versions of IAS 36 (Impairment of Assets) and IAS 38 (Intangible Assets). Other agreed changes to existing standards forming part of the IASB Improvement Projects, or new standards issued for the first time, will be applied to the consolidated financial statements for the year ended December 31, 2005. With the exception that goodwill and other intangible assets with indefinite useful lives will no longer be amortized, we do not anticipate any material effects. The individual financial statements are drawn up on the same accounting date as those of Henkel KGaA. The financial statements of companies included in the consolidation have been audited by members of the KPMG organization or by other independent firms of auditors instructed accordingly. The consolidated financial statements have been prepared under the historical cost convention, with the exception that certain financial instruments are stated at their fair values. In order to improve the clarity and informative value of the consolidated financial statements, certain items are combined in the balance sheet and in the statement of income and shown separately in the Notes. The following items are shown separately in the statement of income: Research and development costs Scheduled amortization of goodwill Current restructuring costs Exceptional items: Gain arising on the exchange of the investment in Clorox Impairment losses on goodwill Costs of the Advanced Restructuring measures

This gives a better overall picture of the net assets, financial position and results of operations of the Group.

Composition of the Group In addition to Henkel KGaA, the consolidated financial statements include 20 German and 220 foreign companies in which Henkel KGaA holds, directly or indirectly, a majority of the voting rights or which are under the unified management control of Henkel KGaA. A total of 36 dormant companies or companies with insignificant operations have been excluded from the consolidated financial statements, as they are immaterial, individually and in total, to the net assets, financial position and results of operations of the Group. The composition of the Group changed radically in the course of 2004 compared with the previous year. 26 companies have been included in the consolidated Group figures for the first time, 13 companies were merged and 11 companies are no longer consolidated. The investment in Ecolab Inc., St. Paul, Minnesota, USA, is accounted for using the equity method, because the Henkel Group holds more than 20 percent of the voting rights and has significant influence on the financial and business policies of the company.

Henkel Annual Report 2004 59 Notes to the financial statements Notes to the financial statements

Principal acquisitions by business sector in million euros Holding Financial First consoli- in % commitment1) dated Laundry & Home Care and Cosmetics/Toiletries 3,267 Dial Corporation, USA 100 % – Mar. 29, 2004 Dial Holdings, USA (hived-off Clorox businesses) 100 % – Nov. 22, 2004 MasColor, Mexico (asset deal) – April 1, 2004 Advanced Research Laboratories, USA (asset deal) – Feb. 1, 2004 Indola (asset deal) – May 5, 2004 Consumer and Craftsmen Adhesives and Henkel Technologies 388 Sovereign Specialty Chemicals, USA 100 % – Jan. 1, 2005 Orbseal, USA 100 % – Oct. 27, 2004 1) purchase price (5,205 million euros) and liabilities assumed less cash and cash equivalents assumed (1,550 million euros)

Dial acquisition Following the Dial shareholders’ approval of the purchase of their company on March 24, 2004, Henkel acquired all outstanding Dial shares for a total purchase price of 2,875 million US dollars. This represents a price of 28.75 US dollars per Dial share. The transaction was completed on March 29, 2004. The Dial Corporation is a leading manufacturer of consumer goods on the continent of North America. Its product portfolio includes detergents (Purex), toiletries such as soaps and shower gels (Dial), air fresheners (Renuzit) and food products (Armour). In fiscal 2003, Dial achieved sales of 1,345 million US dollars and an EBIT margin of around 18 percent. Seven newly-acquired companies have been included in the consolidation for the first time.

Exchange of the strategic investment in Clorox On November 22, 2004, Henkel exchanged its 28.8 percent investment in The Clorox Company, Oakland, California, USA (around 61.4 million shares) for a newly-formed subsidiary of Clorox. This subsidiary, which now trades under the name Dial Holdings, has a portfolio of operating businesses (household cleaner Soft Scrub and the insecticide businesses Combat, Home Mat and Home Keeper) and a 20 percent investment in Henkel Ibérica worth 744 million US dollars in total, as well as holding 2,095 million US dollars in cash. The total value of the transaction was 2,839 million US dollars. This represents a price of 46.25 US dollars per Clorox share. At the date of the closing, the price of a single share was 56.41 dollars. The agreed block discount was in line with comparable transactions. We are assuming that the transaction will be recognized in the USA as a tax- exempt exchange as defined by the Internal Revenue Code. We obtained the views of two independent US experts on this point, both of whom confirmed our opinion. We also obtained a fairness opinion about the value of the transaction from an investment bank. As a result of the businesses acquired, two new companies were included in the consolidation for the first time.

60 Henkel Annual Report 2004 at average rates year. for the liabilities aretranslated balancesheetdate, midrates atthe whileincome andexpensesaretranslated atthe ruling company companiesfor ofthe consolidationis always localcurrency the includedinthe assetsand the concerned, foreign company in whichthe main currency the generates fundsandmakes payments. functionalcurrency Asthe aretranslated outlinedinIAS21. method intoidation, functional currency eurosusingthe is Thefunctionalcurrency andalsogoodwill arising onconsol- purchaseaccountingmethod, under the charges ofGroupcompanies reflected statements hiddenreserves ofcompaniesThe financial consolidation,includingthe andhidden includedinthe Currency translation netearnings. dation proceduresaffecting basis of market the or transfer on prices. acted tories appropriate ofitsnetassets. the proportion companies.parentof the company subsidiary against netassetsandliabilitiesofthe the aresetoff charges, anddeferred income. In subsequent years, t parentcompany bookvaluesinthe their by against settingoff assets,liabilities,prepaidexpensesanddeferred their ofgoodwillonpageamortization 63,Note 8).Companies time acquired first consolidationfor the areincludedinthe sectiononscheduled details,seethe purchasepriceisrecognized asgoodwill(forrevalued further netassetsand the intangibleassetsareseparately andallidentifiable disclosed.Any arisingbetween difference are fully the reflected bookvaluesarerestated,combinations wherethe allhiddenreserves company andhiddencharges inthe acquired stipulates for consolidationofcapital.Thismethod isusedfor business that the The purchaseaccountingmethod Consolidation principles invest resourcesto these ensurethat rights, acquired markets. fromDialCorp.andHoldings,whichareestablished intheir Henkel isplanningto amounted tosheet. Thegoodwillidentified 2,583millioneuros.Theintangibleassetscomprise mainly trademark tions, intangibleassetsof3,726millioneuroswere revealed balance whichhad notpreviously beenincludedinthe Any restatements companies ofnetassetsinthe acquired were acquisition immaterial. courseofthe transac- Inthe Net assetsacquired Liabilities assumed Liabilities Provisions fordeferred taxliabilities Provisions Total assetsacquired Deferred taxassets Current assets Fixed assets Financial assets Intangible assets/Property, plantandequipment Effect ofsignificantacquisitionsonbalancesheetheadingsattimeacquisiton Deferred taxation,calculated average atthe onconsoli- Group,isaccrued rate ofthe oftaxchargeable onprofits All receivablesandliabilities,sales,incomeexpenses,as well asintercompany assetsorinven- onfixed profits The investment inEcolabInc.,St. Paul, Minnesota,USA,isaccounted equity for andshown usingthe method at supplied by other companiessupplied by Group,areeliminated other inthe onconsolidation.Intra-Group suppliesaretrans- trademarks remain strong in the future. remainstrongtrademarks inthe he book values of participations carried in the accountingrecords inthe carried he bookvaluesofparticipations Dial Corp. 2,375 1,264 3,639 2,926 2,926 in millioneuros 418 407 439 102 611 – Notes tothefinancialstatements Dial Holdings Henkel Annual Report2004 2,297 1,694 2,237 602 602 60 58 1 1 1 – acquisitions Other 680 158 131 838 110 715 326 389 27 13 61 –

Notes to the financial statements Notes to the financial statements

This also applies to all major individual transactions in 2004. The differences arising from using average rather than year-end rates are taken to equity and shown as “Gains and losses recognized in equity” without affecting earnings. In Turkey, the financial statements are prepared in euros. Foreign currency accounts receivable and payable are translated at closing year-end rates of exchange. For the main currencies in the Group, the following exchange rates are used for one euro:

Currency Average rate in currency Closing rate in currency ISO code 2003 2004 2003 2004 British pounds GBP 0.69 0.68 0.7048 0.7050 Swiss francs CHF 1.52 1.54 1.5579 1.5429 Japanese yen JPY 130.91 134.46 135.0500 139.6500 US dollars USD 1.13 1.24 1.2630 1.3621

Notes to the Statement of Income

(0) Effect of significant acquisitions

Effect of significant acquisitions on the statement of income in the year ended December 31, 2004 in million euros

Dial Corp. Dial Holdings Sales 871 12 Gross profit 355 7 Gross profit in % 40.8 58.7 Net earnings –20 –44

(1) Sales Sales comprise sales of goods and services less sales deductions. Sales are recognized when the risk has been transferred. In the case of goods, this coincides with physical delivery. It must also be probable that payment will be made. An analysis of sales by business sector and geographical region compared with the previous year is shown in the segment information on pages 56 and 57.

(2) Cost of sales Cost of sales comprises the cost of products and services sold and the purchase cost of merchandise sold. It consists of the directly attributable cost of materials and primary production cost, as well as indirect overheads including the appropriate amount of wear and tear on fixed assets.

(3) Marketing, selling and distribution costs In addition to marketing organization and distribution costs, the main components of this item are advertising, sales promotion and market research costs. Also included here are the costs of technical advisory services for customers and amounts written off accounts receivable (2004: 20 million euros/previous year: 30 million euros).

62 Henkel Annual Report 2004 Research Laboratories for eleven months. acquisition goodwillarising fromthe ofAdvanced ofthe The DialCorporation andthat for aperiodofninemonths acquisitionyear ofgoodwill arisingfromthe of amortization (125 2004amountincludesthe millioneuros),asthe beforeall goodwillarisingfrombusinesscombinationsagreed endof 2004. March31 untilthe wasamortized date March31. agreement wasonorafter ness combinationswherethe provisions the ofIFRS3, Inaccordance with goodwill must infuturebetested for impairment atleast annually. Thenew standard wasappliedinfullto allbusi- IASBonMarch31,IFRS 3(BusinessCombinations)issuedby the ofgoodwill.Instead, amortization 2004prohibitsthe (8) Scheduledamortizationofgoodwill sakety orfor the ofcustomer goodwill. operating expensesincludeleaseholdpaymentsOther andexpensesrelatingto servicesto berenderedunderwarran- Other operatingexpenses Losses ondisposaloffixedassets Foreign exchangelossesonoperatingactivities Write-downs onmiscellaneousassets Other operatingcharges (7) Otheroperatingcharges ing to 3millioneuros(previous year: 3millioneuros)and operating revenueOther includesincomenot relatingto periodunderreview, the insurance compensation amount- Other operatingrevenue Foreign exchangegainsonoperatingactivities Write-ups offixedassets Income from release ofvaluationallowances Income from release ofprovisions Gains ondisposaloffixedassets Other operatingincome (6) Otheroperatingincome purchasing, accountsandinformation technology departments. personnelandnon-personnelcosts humanresources, ofGroupmanagementThis headingincludesthe andofthe (5) Administrativeexpenses not possibleto make distinction dueto this ahighlevel ofinterdependence. researchphasecanbeclearly dis recognition aremetandthe Research costs may notberecognizedasanasset.Development criteria costs arerecognizedasanassetifallthe for (4) Research anddevelopmentcosts The figure for the amortization of goodwill of 200 million euros was considerably higher than in the previous ofgoodwill of200millioneuroswasconsiderably inthe amortization for higher than the The figure in millioneuros in millioneuros refundsof2millioneuros(previous year: 1millioneuros). tinguished from the developmenttinguished fromthe phase.Currently, itis Notes tothefinancialstatements Henkel Annual Report2004 2003 2003 158 34 23 77 45 27 62 26 4 3 2 9 2004 2004 103 146 61 30 86 22 15 17 63 3 9 3 3

Notes to the financial statements Notes to the financial statements

(9) Current restructuring costs This heading includes severance pay as well as current annual payments for early retirement schemes and similar schemes arising from operational changes.

(10) Exceptional items The operating profit in 2004 has been affected by the following exceptional items:

– Gain arising on the exchange of the strategic investment in Clorox The total value of the transaction to exchange the Clorox investment for the subsidiary hived off from Clorox and now trading under the name Dial Holdings, was 2,839 million US dollars. After deducting the book value of the investment in Clorox and transaction costs and refinancing costs, there was a net gain of 1,770 million euros, which is disclosed separately in the statement of income. There were strategic reasons for commencing the acquisition of the investment in Clorox in 1974, which applied until the recent purchase of Dial.

– Impairment losses on goodwill We conducted our annual comprehensive review of goodwill to test for impairment. We recognized impairment losses where, due to changes in the circumstances and future prospects of the businesses, the estimated cash flows were lower than the carrying amount of the goodwill. The test for impairment was based on estimated future cash flows, calculated from medium-range plans. Underlying these plans is a detailed four-year planning horizon. For the period after the detailed planning horizon, growth rates were used which do not exceed assumed average market or industry sector growth rates in the relevant businesses. In accordance with the management concept applied, the cash flows were discounted at the Group weighted cost of capital of 11 percent before tax. Impairment losses recognized in respect of goodwill totaled 242 million euros, which related mainly to the Dexter and Multicore businesses in Asia and North America acquired in the year 2000.

– Extended/Advanced Restructuring measures During the fiscal year, we continued to implement measures to reduce costs, increase efficiency in production, distribution and administration and to consolidate our market positions. These measures focused particularly on site clo- sures and reorganizations, and further streamlining of functional areas. The amount involved was 408 million euros, including impairment losses on property, plant and equipment of 89 million euros.

(11) Financial items

Financial items in million euros 2003 2004 Net income from associated companies 174 162 Income from Clorox share buy-back 30 – Net result from other participations –2 2 Net interest expense –140 –163 62 1

With effect from their 2002 fiscal years, The Clorox Company and Ecolab Inc. have applied the US GAAP regulation on the measurement of goodwill and are thus no longer amortizing goodwill systematically (the impairment-only approach). Amounts of 9 million euros (previous year: 12 million euros) for Clorox and 9 million euros (previous year: 9 million euros) for Ecolab have been charged against earnings with respect to the proportion of the amortization of goodwill attributable to our respective participations.

64 Henkel Annual Report 2004 Taxes onincome Deferred taxes Current taxes before tax Earnings before taxandanalysisoftaxes Earnings (12) Taxes onincome Interest expenseforpensionprovisions lessexpectedincomefrom planassets Write-downs onlong-termloans Other financialcharges Interest charges payable Other financialincome Interest andsimilarincome Interest from long-termloans Net interest expense 1) and onmarketablesecurities Write-downs onshares inaffiliated andothercompanies Gains ondisposaloffinancialassetsandmarketablesecurities Income from profit andlosstransferagreements Income from participations Net result from otherparticipations period untilNovember 22,2004. fromCloroxThe decreaseinnetincomefromassociated relates figure companies only the to isdueto factthat the the the write-downsonshares inaffiliated andothercompanieswere oninvestmentsinournewbusinessactivitiesandventure capi to others to affiliated companies from others from affiliated companies in othercompanies in affiliated companies in millioneuros in millioneuros in millioneuros Notes tothefinancialstatements Henkel Annual Report2004 2003 2003 2003 –140 –100 –91 –7 227 768 238 –16 –2 11 25 34 1 4 8 – – – – – 1) tal funds 1,921 2004 2004 2004 –163 –101 –106 –96 281 185 –14 –2 21 20 17 65 2 1 1 2 – – – –

Notes to the financial statements Notes to the financial statements

Allocation of deferred taxes in million euros Deferred tax assets Deferred tax liabilities Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2003 Dec. 31, 2004 Trademark rights and other rights 31 17 1 1 Goodwill 82 115 23 396 Property, plant and equipment 34 50 75 91 Financial assets 2 22 64 37 Inventories 17 28 17 15 Other receivables and miscellaneous assets 57 123 16 78 Special tax-allowable items 1 11 115 122 Provisions 187 273 46 59 Liabilities 32 42 32 12 Tax credits 27 19 – – Loss carry-forwards 54 30 – – 524 730 389 811 Amounts netted – 208 – 356 – 208 – 356 Valuation allowances –20 –46 – – Balance sheet figures 296 328 181 455

Deferred tax assets and liabilities are accounted for with respect to temporary differences between the balance sheet valuation of an asset or liability and its tax base, and with respect to tax loss carry-forwards and consolidation procedures affecting earnings. Deferred tax liabilities have not been recognized on the retained profits of foreign subsidiaries because these profits will not be distributed but rather retained in the companies concerned. The increase in deferred tax liabilities under the heading “Goodwill” is due to the inclusion in the consolidation for the first time of The Dial Corporation, with 370 million euros of additional deferred tax liabilities. German companies have recognized deferred tax balances in respect of special tax-allowable items relating to property, plant and equipment and to reinvestment reserves. The deferred tax balances recognized by German and foreign companies with respect to temporary differences on provisions relate mainly to pensions and other post-employment benefits. Any assessment of whether deferred tax assets can be recognized depends on estimating the probability that the deferred tax assets can actually be realized in the future. The level of probability must be more than 50 percent and must be supported by appropriate business plans. Of the valuation allowances on deferred tax assets of 46 million euros (previous year: 20 million euros), 20 million euros relates to loss carry-forwards and 26 million euros to deferred tax assets arising from temporary differences associated with property, plant and equipment. The valuation allowances apply to deferred tax assets with respect to temporary differences between the balance sheet valuation of an asset or liability and its tax base, and to tax loss carry-forwards, and are based on a reassessment of the likelihood that they will be utilized in the future. Deferred taxes have not been recognized with respect to tax loss carry-forwards of 419 million euros (previous year: 379 million euros). Deferred taxes have also not been recognized with respect to tax credits of 8 million euros. Amounts netted represent tax assets and liabilities relating to the same tax authority.

66 Henkel Annual Report 2004 1) Effective taxrate Total taxcharge and otheritems Tax increases duetonon-deductible expenses Tax reductions duetotax-free incomeandotheritems (at-equity investments) Effects ofdifferent taxratesonnetresult from participations in respect ofwhichnodeferred taxassethadbeenrecognized Tax reductions duetotaxlossesbrought forward beingutilized, Tax increases duetonon-deductibleamortizationofgoodwill Tax reductions forprioryears tax ratesandthehypotheticalrate Tax reductions duetodifferences betweenlocal Estimated taxcharge Tax rate(includingmunicipaltradetax)on incomeofHenkelKGaA before taxesonincome Earnings Calculation ofeffective taxrate charge isreconciledto effective taxcharge the disclosed. taking into accountconsolidationprocedures–have reconciliationbelow. beensummarizedinthe Theestimated tax wards isdueto varioustaxplanningmeasurestaken in2004. disposalofassets.Thedecreaseintaxlosscarry-for- arisingfromthe respecttonized with unused losscarry-forwards disposalofassets.Deferred taxes onthe disposalofassetsmay against havethe only profits beoffset notbeenrecog- taxratestries, different apply andinsomecaseslosseson to disposalofassetsandto lossesonthe operating profits, years restriction). Insomecoun- three without must and22millioneurosmay forward beutilizedwithin becarried disposalofassets34millioneuros(ofwhich12This tableincludesunusedlossesarisingfromthe millioneuros Must beutilizedwithin: Expiry datesofunusedtaxlosscarry-forwards andtaxcredits including tax-free incomearisingfrom theexchangeofinvestmentinClorox Carry forward withoutrestriction more than3years 3 years 2 years 1 year Non-deductible withholdingtax Municipal tradetaxadditionsandeffects oftaxaudits Non-deductible expenses The individualcompany and taxrates basisofthe applicableineachcountry reconciliations–preparedonthe in millioneuros Dec. 31,2003 Unused taxlosses 378 621 53 99 47 44 Dec. 31,2004 568 216 186 55 54 57 Notes tothefinancialstatements 79 63 Dec. 31,2003 4 Henkel Annual Report2004 31.0 % 41.3 % 2003 –108 –58 –21 –55 238 146 317 768 Tax credits 34 34 18 –1 – – – – 104 126 Dec. 31,2004 10 40.0 % 809 – 9.6 % 1,921 2004 –59 –83 185 240 128 768 27 27 67 – – – – – – 1)

Notes to the financial statements Notes to the financial statements

The increase in tax as a result of non-deductible expenses to 126 million euros (previous year: 63 million euros) is due to restructuring costs, only some of which were deductible in 2004. The effective tax rate on operating profit (EBIT) before exceptional items, adjusted for the non-amortization of goodwill in the following year in an amount of 200 million euros, is 25.7 percent (with goodwill amortization: 32.1 percent). German corporation tax legislation stipulates a statutory rate of 25.0 percent plus the solidarity surcharge of 5.5 percent. After taking into account municipal trade tax, this gives an expected tax rate of 40.0 percent for 2004 (41.3 percent in the previous year due to the Flood Victim Solidarity Law of 2003). The deferred tax asset taken to equity amounted to 9 million euros (previous year: 5 million euros).

(13) Minority interests The amount shown here represents the share of profits and losses attributable to other shareholders. The share of profits amounted to 14 million euros (previous year: 22 million euros) and that of losses to 13 million euros (previous year: 11 million euros).

Notes to the Balance Sheet The measurement of balance sheet items is described in the relevant Note.

Effect of significant acquisitions

Effect of significant acquisitions on balance sheet headings at December 31, 2004 in million euros

Dial Corp. Dial Holdings Intangible assets/Property, plant and equipment 2,541 370 Financial assets – 842 Fixed assets 2,541 1,212 Current assets 313 1,554 Deferred tax assets 93 – Total assets 2,947 2,766 Equity 580 2,709 Provisions 258 4 Provisions for deferred tax liabilities 346 48 Liabilities 1,763 5 Total equity and liabilities 2,947 2,766

Fixed assets Fixed assets with finite lives are always depreciated using the straight-line method on the basis of estimated useful lives standardized throughout the Group, with impairment losses being recognized where required.

68 Henkel Annual Report 2004 At Dec.31,2004 Translation differences Reclassifications Disposals Additions Changes intheGroup/acquisitions 1,2004 At Dec.31,2003/Jan. Translation differences Reclassifications Disposals Additions Changes intheGroup/acquisitions At January1,2003 Cost stated atproductioncost. Intangible assetsacquired for valuableconsideration arestated atacquisition cost, internally generated is software (14) Intangibleassets usefullives indefinite acquired March31,Goodwill andintangibleassetswith after 2004have notbeenamortized. Factory andresearch equipment Vehicles Office equipment Machinery Production facilities Research andfactorybuildings,workshops,stores andstaff buildings Office buildings Residential buildings Goodwill Trademarks andotherrights Useful life The following standard usefullives continueto basisfor anddepreciation: calculatingamortization beusedasthe in millioneuros in years Trademark rights and otherrights 1,143 1,623 –112 –43 –27 –25 607 532 26 25 25 77 2 Notes tothefinancialstatements Goodwill Henkel Annual Report2004 4,588 2,583 2,280 2,450 275 – 200 – –20 –14 64 – – – – 20 to25 25 to33 33 to40 15 to20 7 to10 8 to20 6,211 3,726 2,887 2,982 387 – 227 – Total –43 –39 141 26 25 10 50 69 2 5 5 5

Notes to the financial statements Notes to the financial statements

Accumulated amortization in million euros Trademark rights and other rights Goodwill Total At January 1, 2003 355 841 1,196 Changes in the Group/acquisitions – – – Amortization1) 33 125 158 Disposals –24 – 9 –33 Reclassifications 5 – 5 Translation differences –18 –62 –80 At Dec. 31, 2003/Jan. 1, 2004 351 895 1,246 Changes in the Group/acquisitions – – – Amortization2) 68 442 510 Disposals –43 – –43 Reclassifications 1 – 1 Translation differences –24 –33 –57 At December 31, 2004 353 1,304 1,657

Net book value at December 31, 20043) 1,270 3,284 4,554 Net book value at December 31, 2003 256 1,385 1,641

1) of which impairment losses 2003 – – – 2) of which impairment losses 2004 – 242 242 3) of which with indefinite useful lives 87 487 574

(15) Property, plant and equipment

Cost in million euros Payments on account and Land, land Factory assets in rights and Plant and and office course of buildings machinery equipment construction Total At January 1, 2003 1,557 2,292 768 84 4,701 Changes in the Group/acquisitions 9 20 2 – 31 Additions 43 105 76 97 321 Disposals –42 –121 –64 –4 – 231 Reclassifications 16 27 19 –67 –5 Translation differences –70 –76 –28 –4 –178 At Dec. 31, 2003/Jan. 1, 2004 1,513 2,247 773 106 4,639 Changes in the Group/acquisitions 25 119 17 26 187 Additions 48 127 74 95 344 Disposals –26 –106 –71 –7 – 210 Reclassifications 29 53 13 –97 –2 Translation differences –34 –46 –16 –7 –103 At Dec. 31, 2004 1,555 2,394 790 116 4,855

70 Henkel Annual Report 2004 ing. The updated net asset figure istranslated closingrateing. Theupdated atthe netassetfigure ofexchange balancesheetdate. atthe ruling ofitsnetassets(seeNoteproportion 47, page 92).Thepercentage holdingis calculated basisofsharesoutstand- onthe company 1, consolidationfromJanuary 2005. willbeincludedinthe companies.Chicago, Illinois,USA,for 293millioneuros,whichhasbeenincludedinadditionsto This affiliated are held-to-maturity investments aremeasuredsubsequently cost. atamortized fairvaluecannotbereliably for determined participations whichthe or subsequently fairvalues.Other attheir assetsaremeasuredinitially atcost and companies disclosedinfinancial participations andother Shares inaffiliated (16) Financialassets is charged over usefullives assetsshown the ofthe onpage 69. waysecured inthis amounted to 23millioneurosatDecember31, 2004(previous year: 28millioneuros).Depreciation shown netofinvestment mortgages. Theliabilities isencumberedwith andallowances. grants property Some ofthe of overheads; interest charges onborrowings are andsellingdistribution costs arenotincluded.Cost figures Additions arestated atpurchaseormanufacturingcost. Thelatter includes directcosts and appropriate proportions 2) 1) at December31,2003 Net bookvalue at December31,2004 Net bookvalue At December31,2004 Translation differences Reclassifications Disposals Depreciation Write-ups Changes intheGroup/acquisitions 1,2004 At Dec.31,2003/Jan. Translation differences Reclassifications Disposals Depreciation Write-ups Changes intheGroup/acquisitions At January1,2003 Accumulated depreciation including impairmentlosses2004 including impairmentlosses2003 The shares in the associatedThe sharesinthe company EcolabInc. areaccounted appropriate equity for atthe usingthe method On December27, 2004,Henkel Investment Inc.,USA,acquired sharesofSovereign allthe Specialty ChemicalsInc., 2) 1) in millioneuros Land, land rights and buildings –20 –26 777 796 759 736 745 –18 –12 –5 –8 –2 59 46 16 –1 1 3 – machinery Plant and 1,630 1,655 1,681 –104 –43 –29 –96 186 129 617 713 – 9 –3 –8 60 –1 3 6 1 equipment and office Factory –59 –66 588 580 185 184 606 –17 –13 – 1 98 81 15 3 1 – – – – Notes tothefinancialstatements Payments on account and construction course of assets in Henkel Annual Report2004 104 115 –2 –2 1 2 4 1 1 – – – – – – – – – – 1,683 1,808 3,047 2,956 2,984 Total –176 –191 –60 –80 344 256 –13 – 3 –5 –9 92 10 –1 71 1

Notes to the financial statements Notes to the financial statements

Long-term loans are stated at amortized cost. At December 31, 2003 the long-term loans included a vendor note for 403 million euros (including interest) in connection with the sale of Cognis. On May 13, 2004, the vendor note, including accrued interest to that date, was redeemed in a total amount of 413 million euros.

Cost in million euros Shares in Affiliated associated Other Long-term companies companies participations loans Total At January 1, 2003 24 790 108 520 1,442 Changes in the Group/acquisitions 4 – – – 4 Additions 29 129 288 26 472 Disposals –2 –1261) – 281 –7 – 416 Reclassifications – – – – – Translation differences – –77 – –77 At Dec. 31, 2003/Jan. 1, 2004 55 716 115 539 1,425 Changes in the Group/acquisitions –28 – –3 – –31 Additions 326 120 5 10 461 Disposals –5 –3852) –1 – 415 – 806 Reclassifications – – – – – Translation differences – 12 – 12 At December 31, 2004 348 463 116 134 1,061

1) effect of Clorox share buy-back 2) disposal of Clorox at book value

Accumulated write-downs in million euros Shares in Affiliated associated Other Long-term companies companies participations loans Total At January 1, 2003 5 – 12 1 18 Changes in the Group/acquisitions 4 – – – 4 Write-ups – – – – – Write-downs – – 6 – 6 Disposals –2 – – – –2 Reclassifications – – – – – Translation differences – – – – – At Dec. 31, 2003/Jan. 1, 2004 7 – 18 1 26 Changes in the Group/acquisitions – – – – – Write-ups – – – – – Write-downs – – 2 – 2 Disposals –4 – –1 – –5 Reclassifications – – – – – Translation differences – – – – – At December 31, 2004 3 – 19 1 23

Net book value at December 31, 2004 345 463 97 133 1,038 Net book value at December 31, 2003 48 716 97 538 1,399

72 Henkel Annual Report 2004 Amounts receivable from companiesinwhichparticipationsare held them arecoveredthem by valuationallowances. receivablesandmiscellaneousassetsareshownOther atfacevalueorattributablefairvalue.Any associated risks with Deferred charges Miscellaneous assets Derivatives withpositivefairvalues Amounts receivable from non-consolidatedaffiliated companies Other receivables andmiscellaneousassets (19) Otherreceivables andmiscellaneousassets A total of 20millioneuros(previous year: 30millioneuros)has been provided form ofvaluationallowances. inthe oneyear.Trade accountsreceivableareduewithin arecovered risks by appropriate Specific valuationallowances. (18) Trade accountsreceivable Payments onaccountformerchandise Finished products andmerchandise Work inprocess Raw materialsandsupplies Analysis ofinventories lion eurosatDecember31, 2004(previous year: 26millioneuros). productsisderived market lower fromtheir value)totaledtheir caseoffinished 29mil- realizablevalue(whichinthe hand,arenotincluded.Inventories other balancesheetat periodofmanufacture, onthe includedinthe during the employees engaged productionprocess,andproduction-related inthe depreciationcharges. Interest charges incurred productsstore),costs aswell priorto finished the asproduction-related administrative expensesand pensioncosts for overheads raw goodsinward department, priate ofnecessary (e.g.the materials proportions andother store, filling Inventories arestated weighted atpurchaseormanufacturingcost, usingFIFOandthe average asappropiate. method (17) Inventories (of which with a residual term of more than1year) ofmore term (of whichwitharesidual than1year) ofmore term (of whichwitharesidual than1year) ofmore term (of whichwitharesidual borrower’s note loans:0millioneuros(previous year: 50 millioneuros). payments madeon account:15 million euros(previous year: 25millioneuros), security andguarantee deposits:24millioneuros (previous year: 40millioneuros), amounts receivablefromsuppliers:17 million euros(previous year: 26millioneuros), amounts receivablefromemployees: 13 millioneuros(previous year: 13 millioneuros), claims for taxrefunds:189 millioneuros(previous year: 104 millioneuros), insurance claims:6millioneuros(previous year: 8millioneuros), following:Miscellaneous assetsincludethe lowerThey arevaluedatthe ofcost andmarket. Manufacturingcost includes–inadditionto directcosts –appro- in millioneuros in millioneuros Notes tothefinancialstatements Dec. 31,2003 Dec. 31,2003 Henkel Annual Report2004 1,053 (146) 699 291 521 445 56 27 38 (–) (–) 2 7 9 Dec. 31,2004 Dec. 31,2004 1,196 (113) 588 124 780 350 777 36 58 22 (–) (–) 73 8 7

Notes to the financial statements Notes to the financial statements

(20) Liquid funds and marketable securities

Liquid funds and marketable securities in million euros Dec. 31, 2003 Dec. 31, 2004 Liquid funds 746 137 Marketable securities 442 1,558 1,188 1,695

Marketable securities are stated at their fair values at the balance sheet date. They comprise mainly short-term money market instruments. Price movements are recognized in the statement of income under financial items. The increase is due to the cash inflow of 2,095 million US dollars from the Clorox share exchange, which was invested in money market funds of the highest financial standing.

(21) Deferred tax assets Deferred tax assets result from the following factors: timing differences between the balance sheet valuation of an asset or liability and its tax base, tax losses carried forward which are expected to be utilized, consolidation procedures at Group level.

The allocation of deferred tax assets to the various balance sheet headings is shown in Note 12 (Taxes on income, page 65).

(22) Subscribed capital

Subscribed capital in million euros Dec. 31, 2003 Dec. 31, 2004 Ordinary bearer shares 222 222 Non-voting preferred bearer shares 152 152 Capital stock 374 374 Breakdown: 86,598,625 ordinary shares and 59,387,625 non-voting preferred shares

At the Annual General Meeting of Henkel KGaA on April 30, 2001, the personally liable managing partners were authorized – with the approval of the Shareholders’ Committee and of the Supervisory Board – to increase the capital of the Company in one or more installments at any time up to May 1, 2006, up to a total of 25,600,000 euros by issuing new non-voting preferred shares to be paid up in cash (authorized capital). The personally liable managing partners were authorized – with the approval of the Shareholders’ Committee and of the Supervisory Board – to exclude the statutory pre-emptive rights of existing shareholders. Pre-emptive rights may only be excluded, however, for fractional entitlements or on condition that the issue price for the new shares is not significantly less than the quoted market price of shares of the same category at the time the issue price is finally fixed. At the Annual General Meeting of Henkel KGaA on April 14, 2003, the personally liable managing partners were authorized to purchase ordinary or preferred shares in the Company not exceeding 10 percent of the capital stock, i.e. up to 14,598,625 shares, at any time up to October 14, 2004. This authorization was renewed for the period until October 18, 2005 at the Annual General Meeting on April 19, 2004, and at the same time the authorization granted in the previous year was withdrawn.

74 Henkel Annual Report 2004 pared with the end of the respective endofthe previous year. the pared with 268million euros)com- 322million euros(previous year: upby – atDecember31,lation difference 2004wasupby – companies alsotaken instruments to takensubsidiary revaluation equity. to of financial ofthe equity effects andthe statements offoreign annualfinancial ontranslation differences ofthe The items headingrepresentthe underthis (25) Gainsandlossesrecognized inequity to equity. Theseresultfrommovements inforeign exchange rates. Revenue reserves alsocomprise equity changes inthe valuationofourinvestment inEcolab,whicharetaken directly The revenue reserves following: includethe (24) Revenuereserves and convertible warrant bondsissued. The capitalreserve comprises amountsreceived the inprevious y (23) Capitalreserve nominalvalueof9,126.40 aproportional with capitalstock). euros(0.0024percentofthe were exercised Stock under the stock timeleadingto Incentive held areductionof3,565intreasury first Planfor the were originally boughtbackin2000,808,120 in2001 and694,900in2002(2,495,700sharestotal). In2004options sents 1.71 capitalstock shares percentofthe nominalvalueof6.39millioneuros.992,680these andaproportional required. stock resolution inGeneral any Meeting being Board without –to treasury further cancelthe Supervisory and ofthe transfer shares. the Board –to and offer approval Supervisory the ofthe Incentive Shareholders’Committee –with Plan,the isauthorized Management Company BoardInsofar asmembersofthe ofthe eligibleto Stock areamongthose participate inthe to them existing offering shareholders,by: sharesacquired, first Board –to without disposeoftreasury Supervisory the approval Shareholders’Committee the ofthe andof wereThe personally –with liablemanagingpartners authorized buy-back of treasury stock by oftreasury Henkelbuy-back KGaA atcost. amounts allocated Grouplessminorityinterests, fromconsolidated ofthe netearnings statements ofHenkelamounts allocated financial KGaA inthe inprevious years, sharesareissuedorsold. the pre-emptiveing the rightsofexisting shareholders,must notexceed 10 existing capitalstock percentofthe when capitalwhileexclud- new sharesissuedoutofauthorized numberofsharessold,together the case,the with this lower quoted sharesisnotsignificantly the purchasepriceofthe than market date sale.In the priceonthe ofthe for inmarket addressedto cashinawayselling them orviaanoffer than allshareholders,provided other that interestsbusinesses orparticipating inbusinessesorfor forming businesscombinations,or ways inother ortransferring purposeofacquiring for to of parties them the businesses,parts selling them third Group, or companies Stock terms inGermany ofthe affiliated andabroadunderthe certain Incentive Henkel Planofthe nel ofHenkel KGaA andto management executive boards membersofthe andcertain management personnelof to andtransferring Managementoffering executive them Board membersofthe andcertain management person- Due to exchange the rate weakness USdollar, ofthe negative Japaneseyen Britishpound,the the trans- andthe stock Company heldbyTreasury the atDecember31, 2004amounted to 2,492,135 preferred shares.Thisrepre- approval Shareholders’Committee the ofthe wereThe personally –with liablemanagingpartners alsoauthorized ears inexcess nominalvalueofpreferred shares ofthe Notes tothefinancialstatements Henkel Annual Report2004 75

Notes to the financial statements Notes to the financial statements

(26) Minority interests This heading comprises the shares of third parties in the equity of a number of companies included in the consolidation, primarily in Asia.

(27) Provisions for pensions and other post-employment benefits Employees of companies included in the consolidation have entitlements under company pension plans which are either defined contribution or defined benefit plans. These take different forms depending on the legal, financial and tax regime in each country. The level of benefits provided is based, as a rule, on the length of service and earnings of the person entitled. The defined contribution plans are structured in such a way that the Company pays contributions to public or private sector institutions on the basis of statutory or contractual terms or on a voluntary basis and has no further obligation regarding the payment of benefits to the employee. In defined benefit plans, the liability for pensions and other post-employment benefits is calculated at the present value of the future obligations (the projected unit credit method). This actuarial method of calculation takes future trends in wages, salaries and retirement benefits into account. Effective January 1, 2004, the defined benefit plans in Germany were predominantly harmonized on the basis of a unit-based plan (Pensions 2004).

Trends in wages, salaries and retirement benefits in percent Germany1) USA Rest of world1) 2003 2004 2003 2004 2003 2004 Discount factor 5.25 4.8 6.25 6.0 2.0 – 6.0 2.0 – 6.0 Income trend 3.0 3.0 4.25 4.0 – 4.3 1.5 – 4.0 2.0 – 4.0 Retirement benefit trend 1.25 1.0 – 1.25 – – 0 – 2.5 0 – 2.5 Expected return on plan assets – 5.5 7.0 7.0 – 8.0 2.0 – 7.0 2.0 – 7.0 Expected increases in costs for medical benefits – – 11.5 10.0 – 10.5 8.0 – 11.5 6.0 – 10.5 1) for the Euro Zone, a discount factor of 4.8 percent is used

76 Henkel Annual Report 2004 Unrecognized pastservicecost Unrecognized actuarialgains/losses Fair valueoffundassets Present valueoffundedobligations Present valueofunfundedobligations other post-employmentbenefits: Analysis ofprovisions forpensionsand Balance atDecember31,2003 Released Utilized post-employment benefits Employer’s paymentsforpensionsandother Employer’s contributionstoplanassets Allocated on planassets Expected return Interest expense Gains/losses arisingfrom theterminationandcurtailmentofplans Amortization ofactuariallosses Amortization ofpastservicecost Current servicecost Changes intheGroup/Translation differences At January1,2003 at December31,2003(for2004figures, seepage78) Provisions forpensionsandotherpost-employmentbenefits in millioneuros Germany 1,462 1,426 1,620 1,462 –182 –34 –95 –95 128 86 42 58 –1 4 – – – – – – 206 – USA –45 –45 –50 114 235 –12 –14 Notes tothefinancialstatements –2 –5 33 22 16 97 81 81 4 3 – – Henkel Annual Report2004 Rest of world 248 – –68 –31 104 326 –18 –15 –13 –3 –1 –4 33 19 24 90 99 99 3 2 – 1,642 1,807 1,642 1,644 295 – 488 – Total –176 –113 –63 –27 619 194 127 –13 – 7 –1 82 77 4 6 2

Notes to the financial statements Notes to the financial statements

Provisions for pensions and other post-employment benefits at December 31, 2004 in million euros Rest of Germany USA world Total Balance at January 1, 2004 1,462 81 99 1,642 Changes in the Group/Translation differences 4 167 2 173

Current service cost 34 21 30 85 Amortization of past service cost 1 0 1 2 Amortization of actuarial losses 2 2 3 7 Gains/losses arising from the termination and curtailment of plans 3 0 1 4 Interest expense 84 39 21 144 Expected return on plan assets – –27 –16 –43 Allocated 124 35 40 199

Employer’s contributions to plan assets –3 –26 –18 –47 Employer’s payments for pensions and other post-employment benefits –103 –18 –17 –138 Utilized –106 –44 –35 –185

Released 0 –7 –7 –14

Balance at December 31, 2004 1,484 232 99 1,815

Analysis of provisions for pensions and other post-employment benefits: Present value of unfunded obligations 1,731 258 89 2,078 Present value of funded obligations 61 435 366 862 Fair value of fund assets –34 – 416 – 273 – 723 Unrecognized actuarial gains/losses – 274 –45 –84 – 403 Unrecognized past service cost – – 1 1 1,484 232 99 1,815

Actuarial gains and losses are not recognized, provided they do not exceed 10 percent of the present value of the pension obligations. That portion of the actuarial gains and losses which exceeds 10 percent of the present value of the obligations is amortized from the following year over the expected average remaining working lives of the employees. Of the amounts allocated to the provision in 2004, some 91 million euros (previous year: 88 million euros) is included in operating profit (pension costs, page 85) and 108 million euros (previous year: 106 million euros) in financial items (page 65). In addition to the interest expense less the expected return on plan assets totaling 101 million euros (previous year: 100 million euros), other financial charges also includes 7 million euros (previous year: 6 million euros) which relates to the amortization of actuarial losses.

78 Henkel Annual Report 2004 tax base used by the individualcompanies (pagetax baseusedby consolidationto 66). the includedinthe calculate taxableprofits their to between headingpertain consolidated differences The amountsunderthis valuationsinthe balancesheetandthe (29) Provisions fordeferred taxliabilities generally oneyear. duewithin and legal proceedings. balance sheetdate. commercialjudgement. Provisionstions, basedonprudent whichincludeinterest elementsarediscounted to the provisions best estimatesThe amountsrecognizedasother arethe expenditurerequired ofthe to obliga- settlethe Administration Production andengineering Personnel Marketing, sellinganddistribution Sundry provisions Advanced Restructuring Extended Restructuring Strong fortheFuture/ Sundry provisions Tax provisions Changes in2004 Extended Restructuring Strong fortheFuture/ Sundry provisions Tax provisions Changes in2003 (28) Otherprovisions The sundry provisions pertain to identifiable obligations provisions toward to pertain They identifiable arecostedThe sundry parties. third infullandare The taxprovisions comprise outcome taxliabilitiesandamountssetasidefor accrued the ofexternal taxaudits Special circumstances Group/acquisitions includechanges inthe andforeign exchange effects. in millioneuros in millioneuros in millioneuros Balance Balance Jan. 1, Jan. 1, 1,146 1,056 2004 2003 699 272 688 388 85 70 – stances stances circum- circum- Special Special –20 250 229 –17 –4 25 –1 4 – Utilized Utilized 882 – 811 – 499 – 252 – 707 – –109 –60 –66 – Released Released –53 –45 –34 –40 –19 Notes tothefinancialstatements –5 Dec. 31,2003 – – – Henkel Annual Report2004 Allocated Allocated 699 251 203 187 58 1,134 123 564 151 308 703 791 76 – Dec. 31,2004 Balance Balance Dec. 31, Dec. 31, 1,513 1,056 2004 2003 884 308 281 239 304 884 306 699 272 56 19 85 79

Notes to the financial statements Notes to the financial statements

(30) Borrowings This heading includes all interest-bearing obligations outstanding at December 31, 2004. Maturity structure of obligations at December 31, 2003:

Borrowings in million euros Residual term more than between 1 Dec. 31, 2003 5 years and 5 years up to 1 year Total Bonds 949 22 164 1,135 (of which amounts secured) (1) Loans from employee welfare funds of the Henkel Group – 11 4 15 (of which amounts secured) (–) Bank loans and overdrafts 1 33 280 314 (of which amounts secured) (109) Other financial liabilities 8 37 346 391 958 103 794 1,855

The bonds at December 31, 2003 included the following:

Bonds in million euros Issued by Type Nominal value Interest rate Interest fixed Henkel KGaA Bond 1,000 4.2500 see1) Henkel Corporation Eurobond 159 5.3750 until 20042) 1) fixed-rate interest of bond coupon = 4.25 percent, converted using interest rate swaps into a floating interest rate (2.5571 percent at December 31, 2003) 2) hedged by cross currency swap

Maturity structure of obligations at December 31, 2004:

Borrowings in million euros Residual term more than between 1 Dec. 31, 2004 5 years and 5 years up to 1 year Total Bonds 1,012 339 27 1,378 (of which amounts secured) (35) Commercial papers1) – – 1,070 1,070 Loans from employee welfare funds of the Henkel Group – 9 4 13 (of which amounts secured) (4) Bank loans and overdrafts 5 20 313 338 (of which amounts secured) (154) Other financial liabilities – – 375 375 1,017 368 1,789 3,174

1) this figure comprises an amount of 665 million euros from the US dollar Commercial Paper Program (total volume 2 billion US dollars) and an amount of 405 million euros from the Commercial Paper Program (total volume 1 billion euros)

80 Henkel Annual Report 2004 Sundry liabilitiesinclude: Sundry deferred income Sundry liabilitiesincluding Derivatives withnegativefairvalues social security Liabilities inrespect of Liabilities inrespect oftaxation participations are held companies inwhich Accounts payabletoother affiliated companies non-consolidated Accounts payableto (32) Otherliabilities Trade accountspayable areallduefor payment ayear. within (31) Trade accountspayable quarter first of2005. terms andconditionsin the their accordance with coupon of6.50percent,maturinginSeptember 2008.Henkel plansto USdollarbondsin cancelandredeemboth acouponof7.00lars with percent,maturinginAugust a 2006,andasecondbondfor 200millionUSdollarswith The bondissuedby Henkel KGaA acouponof4.25percentmaturesinJune2013. for 1billioneurosin2003with Other liabilities 2) 1) Dial Corporation Dial Corporation Henkel KGaA Issued by Bonds The bondsatDecember31, following: 2004includedthe fixed-rate interest ofbondcoupon=4.25percent, convertedusinginterest rateswapsintoafloating interest rate(2.5751pe fixed-rate interest ofbondcoupon=6.5percent, convertedusinginterest rateswapsintoafloating interest rate(4.84perce (of whichamountssecured) advance payments received: 4million euros (previous year: 6millioneuros). liabilities to employees: 128 millioneuros(previous year: 86millioneuros), payroll taxes/deductions for employees: 37millioneuros(previous year: 43millioneuros), commission payable: 4millioneuros(previous year: 5millioneuros), liabilities to customers: 14 millioneuros(previous year: 25millioneuros), Other financial liabilities include interest-bearing loans from third parties and finance bills. liabilitiesincludeinterest-bearing andfinance parties loansfromthird financial Other acquisition the ofTheDialCorporation onMarch29,2004,HenkelWith assumedabondfor 250millionUSdol- in millioneuros in millioneuros than 5years term more Residual 59 15 44 – – – – term upto Residual USD Bonds USD Bonds 1 year 373 253 30 67 16 Bond 3 4 Type Dec. 31, Nominal value 2003 Total 289 453 47 30 67 16 (–) 4 1,000 than 5years 147 184 term more Residual Notes tothefinancialstatements 38 38 – – – – – Interest rate Henkel Annual Report2004 6.5000 7.0000 4.2500 term upto Residual 1 year nt atDecember31,2004) rcent atDecember31,2004) 361 170 130 10 33 15 3 Interest fixed until 2006 Dec. 31, Total 2004 see see 130 287 478 10 33 15 (1) 81 3 2) 1)

Notes to the financial statements Notes to the financial statements

(33) Contingent liabilities

Contingent liabilities in million euros Dec. 31, 2003 Dec. 31, 2004 Bills and notes discounted 5 6 Liabilities under guarantee and warranty agreements 15 20 Collateral 1 –

(34) Other financial commitments The amounts shown are the nominal values. Payment obligations under rent, leasehold and lease agreements are shown at the total amounts payable up to the earliest date when they can be terminated. At December 31, 2004, they were due for payment as follows:

Rent, leasehold and lease commitments in million euros Dec. 31, 2003 Dec. 31, 2004 Due in the following year 30 27 Due within 1 to 5 years 69 65 Due after 5 years 9 31 108 123

The order commitments for property, plant and equipment amounted to 27 million euros at the end of 2004 (previous year: 26 million euros); purchase commitments arising from toll manufacturing agreements amounted to 62.6 million euros (previous year: 77.5 million euros). Payment commitments under the terms of agreements for capital increases and share purchases signed prior to December 31, 2004 amounted to 22 million euros (previous year: 27 million euros).

(35) Derivatives and other financial instruments

Treasury standards and systems The Corporate Treasury department manages currency exposure and interest rates centrally for the Group and therefore all transactions with financial derivatives and other financial instruments. Trading, treasury control and settle- ment (front, middle and back office) are separated both physically and in terms of organization. The parties to the contracts are German and international banks which Henkel monitors regularly, in accordance with Group Treasury standards, for creditworthiness and the quality of their quotations. The use of financial derivatives to manage currency exposure and interest rate risks in connection with operating activities and the resultant financing requirements also complies with Treasury standards. Financial derivatives are entered into exclusively for hedging purposes. The currency and interest rate risk management of the Group is supported by an integrated Treasury system, which is used to identify, measure and analyze the Group’s currency exposure and interest rate risks. In this context, integrated means that the entire process from the initial recording of financial transactions to their entry in the accounts is covered. Much of the currency trading takes place on intranet-based multi-bank dealing platforms. Foreign currency transactions traded in this way are automatically transferred into the Treasury system. The currency exposure and interest rate risks reported by all subsidiaries under standardized reporting procedures are integrated into the Treasury system by data transfer. As a result, it is possible to retrieve and measure at any time all currency and interest rate risks across the Group and all derivatives entered into to hedge the exposure to these risks. The Treasury system supports the use of various risk concepts. For example, the risk positions and the success of the risk management in each company, country and group of countries can be reassessed on a mark-to-market basis at any time and compared to a benchmark.

82 Henkel Annual Report 2004 taxes (2004:8millioneuros/previous year: 6millioneuros). changes infairvaluewere taken directly to gains andlossesrecognized inequity takingaccountofdeferred after 13 inequity millioneuroswasaccrued atDecember31, 2004,the 2004(previous year: 5millioneuros).Infiscal formally inforeign translation documented entities.Asaresultofthe risks currency hedge accountingrelationship, exchange forward casewith hedges. areusedto Thisisthe contractsilarly that exposureto to hedge the cashflow change inequity andtaken to statement the ofincome. lating to and interest currency rate derivatives. amountof2millioneuroswasaccounted In2004,the for asapositive 2004.Includedinequity hedges fell atDecember31, dueinfiscal flow 2003wasanegative valueof2millioneurosre- hedged transactionthe impacts statement the andinterest ofincome. Allcurrency rate ascash derivatives identified amounts recognizeddirectly inequity periodsinwhich statement reporting areincludedinthe ofincomeinthose the were balancesheetitem. recognizeddirectly inequity initialmeasurementofthe Otherwise, areincludedinthe recognitionofanassetoraliability,results inthe accumulated hedgingtransaction the gains that orlossesonthe riskbeinghedged isreportedin respectofthe immediately statement inthe ofincome.Ifaforecasted transaction are recognizeddirectly inequity. derivative isdetermined gain to orlossonthe that ofthe beineffective Theportion items statementmillion euros/2003:44euros)have inthe ofincome. beenincludedinfinancial both hedged gain bonds(2004:–54 orlossonthe millioneuros)andthe derivativesthe (2004:56millioneuros/2003:–44 hedged item. Theinterest rate derivatives entered into qualify asafairvaluehedge. Thegain orlossonremeasuring items statement gain inthe orlossonthe ofincometogether the financial value isrecognizeddirectly with inthe hedge) orasahedge ofanetinvestment(cash flow inaforeign entity. fairvalueofanassetoraliability(fairhedge), exposureto asahedgethe ofthe variabilityinfuturecashflows hedged by underlying fairvaluesofthe identicalchanges virtually transactions. inthe are offset Group strategy, statement arerecognizeddirectly derivatives inthe fairvalues ofthe ofincome.Thechanges inthe derivatives,of these whichfromaneconomicpointofview framework representeffective the hedges within ofthe respect to conditionssetoutinIAS39with hedge the accountinghavevalue dependsonwhether beenmet. balancesheetdate. fairvaluesonthe Theaccounting treatmentofgains andlossesonremeasurementtotheir fair set outinIAS39regarding ahedgingrelationship,aremeasuredunderhedge accountingrules. Financial liabilitiesinrespectofwhichahedgingtransaction hasbeenentered into, conditions andwhichmeetthe loans areaccounted for cost. atamortized items. statement arerecognizeddirectly Long-term inthe securities andparticipations ofincomeunderfinancial fair valuecannotbereliably determined orwhichareheld-to-maturity investments. fairvalueofall Changes inthe assetsandto infixed cost marketable participations appliesonlyamortized to securitiesfor other whichthe those Financial assetsaremeasuredinitially atcost andsubsequently fairvalues.Subsequent attheir measurementat Recognition andmeasurement offinancialinstruments Hedge ofanet investment inaforeign entity:Hedges ofnetinvestments inforeign entitiesareaccounted for sim- hedges: fairvalueofderivatives Changes inthe usedtoCash flow exposureto hedge the variabilityincashflows Fair valuehedges: Thegain orlossfromremeasuringderivatives usedto exposureto hedge the changes infair exposureto asahedgeUnder ofthe changes in isidentified hedge instrument accounting,aderivative financial Hedge majority accountingisnotusedfor fairvalues Thechanges the instruments. inthe ofderivative financial entered instruments All derivative into Grouparemeasuredinitially by financial atcost the andsubsequently at effective cost interest usingthe maturityaremeasuredatamortized afixed Financial method. liabilitieswith Notes tothefinancialstatements Henkel Annual Report2004 83

Notes to the financial statements Notes to the financial statements

Fair values of derivative financial instruments The fair values of forward exchange contracts are determined on the basis of current European Central Bank reference prices, taking into account forward premiums and discounts. Currency options are measured using market quotations or recognized option pricing models. The fair values of interest rate hedging instruments are calculated on the basis of discounted expected future cash flows, applying current market interest rates over the remaining term of each derivative. The interest rates used for the four most important currencies are given in the table below. It shows the interest rates quoted on the inter-bank market on December 31 in each case.

Interest rates in percent per annum at December 31 EUR USD JPY GBP Maturities 2003 2004 2003 2004 2003 2004 2003 2004 3 months 2.10 2.14 1.10 2.56 – 0.04 – 0.02 4.01 4.81 6 months 2.14 2.22 1.18 2.80 – 0.02 0.02 4.12 4.78 1 year 2.27 2.41 1.41 3.13 0.03 0.06 4.34 4.79 2 years 2.74 2.63 2.13 3.20 0.20 0.18 4.65 4.84 5 years 3.68 3.17 3.61 3.85 0.73 0.68 4.95 4.86 10 years 4.39 3.75 4.61 4.51 1.40 1.48 5.03 4.86

Derivative financial instruments with a positive fair value at the balance sheet date are included in miscellaneous assets and those with a negative fair value are included in other liabilities. The following positions were held at the balance sheet date:

Derivative financial instruments at December 31 in million euros Nominal value Positive fair value Negative fair value 2003 2004 2003 2004 2003 2004 Forward exchange contracts 1,162 2,969 22 110 –3 –10 (of which for hedging loans within the Group) (898) (2,207) (16) (84) (– 2) (– 5) Currency options 39 – 1 – – – Interest rate swaps 1,050 1,147 – 12 –44 – Cross currency swaps 164 11 15 2 – – Total derivative financial instruments 2,415 4,127 38 124 –47 –10

84 Henkel Annual Report 2004 expensed. Thisrelates to optionrightsgranted in2003and2004. Companythe employee. receives servicesofthe the years optionvaluewillberequired from2005,the For to fiscal be stock date grant calculated optionsatthe way inthis willbetreated asapayroll cost spreadover periodinwhich the senior executive grantdate personnelatthe will bedetermined usinganoptionpricingmodel.Thetotal valueofthe 1, fromJanuary Standard total 2005.Therefore,will beapplying effect this the with valueofstock optionsgranted to one preferred sharefor eachoption. companies, make they adirectinvestment andforeign onconditionthat parable German affiliated status of within performance. exercised by reference to absolute and upto subscriptionrightsby the performance reference three to relative the Thesubscriptionrightsattachedtoturn). anoptionaresplitinto two categories. Up to subscriptionrightscanbe five into accountaswellpayments rightsandbenefits asmovements andother shareprice(total inthe shareholderre- issued priorto 2002,aperiodof60trading days isapplied.Thecalculationofrelative takes performance dividend calculated basisof20stock ineachcaseonthe exchange trading AnnualGeneral days Meeting.For the options after date averageshares atthe ofissueiscompared the with market years pricethree later. Theaverage market priceis Dowthe JonesEuroStoxx average targets, performance the 600Index.For both market priceofHenkel preferred takes into accountrelative comparing performance, movement the of invalueofHenkel’s that preferred shareswith Henkelmet. Onetarget preferred ofthe shareprice.Theother performance isbasedonabsolute –the performance andto targets pricedependsonwhether whatextent performance are the canbeboughtperoptionataspecific that Management Board in2005. the ticipate inany risein membersofthe the Management Boardthe andShareholders’Committee. In2004,optionswere caseto last issuedfor time,inthis the years. Under plan,rightsareissuedannually onarevolving the relevant terms beingrevised basis,the eachyear by exer be may shares, which ecutive world. Planaregranted personnelaroundthe inthe optionrightsto Participants subscribefor Henkel preferred The objective Henkel ofthe Stock Incentive Planintroducedin2000isto additionally motivate around 700seniorex- Stock IncentivePlan Pension costs Social securitycontributionsandstaff welfare costs Wages andsalaries Payroll costs (37) Payroll costs services Cost ofexternal Cost ofrawmaterials,suppliesandmerchandise Cost ofmaterials (36) Costofmaterials Statement ofIncome/BalanceSheet Supplementary Informationonthe On February 19, 2004,International FinancialOn February Standard Reporting (IFRS)2“Share-basedPayment” wasissued.We Option rightsaregranted to Management Board membersofthe andheadsofdivisions,to managers ofcom- righttoEach optiongranted the acquire carries upto in millioneuros in millioneuros Management seniorexecutive Board. Other inaschemeto participating personnelarecurrently par- share pricewhichsolely involves payments incash.Thisplanwillbeextended to the cised, onceavesting years aperiodnotexceeding periodofthree haselapsed,within five eight Henkel preferred shares.Theexactnumberofshares Notes tothefinancialstatements Henkel Annual Report2004 1,515 3,552 3,683 1,916 2003 2003 305 131 96 1,594 4,282 2,010 4,450 2004 2004 107 309 168 85

Notes to the financial statements Notes to the financial statements

We have calculated the notional amount which would need to be expensed if IFRS 2 were applied early. The table shows the number of option rights granted per tranche. In addition, it shows the number of shares in the various tranches for which the vesting period has expired. It also shows the notional expense for the period resulting from the valuation of each tranche issued. For the fourth tranche, management availed itself of the right in 2004 to pay in cash the gain arising on the exercise of the options to the employees participating in the plan.

Options/subscribable shares in numbers 1st tranche1) 2nd tranche1) 3rd tranche 4th tranche 5th tranche Total At January 1, 2004 79,840 88,835 120,055 127,155 – 415,885 expressed in shares 239,520 266,505 Options granted 525 – – 105 12,600 13,230 expressed in shares 1,575 – Options exercised 1,608 – – – – 1,608 expressed in shares 4,824 – Options expired 3,150 11,375 5,475 8,070 – 28,070 expressed in shares 9,450 34,125 At December 31, 2004 75,607 77,460 114,580 119,190 12,600 399,437 expressed in shares 226,820 232,380 of which held by the Management Board 4,380 4,380 12,600 10,800 12,600 44,760 expressed in shares 13,140 13,140 of which held by other senior executive personnel 71,227 73,080 101,980 108,390 – 354,677 expressed in shares 213,680 219,240 Notional payroll costs 2004 (million euros) – 2.1 4.7 3.6 0.1 10.5 Comparable notional payroll costs 2003 (million euros) (based on the situation at Dec. 31, 2004) – 3.8 4.7 0.6 – 9.1 Notional payroll costs 2003 (million euros) (based on the situation at Dec. 31, 2003) 4.1 4.5 5.1 1.7 – 15.4 1) number of exercisable options

The costs are calculated on the basis of the Black-Scholes option pricing model, modified to reflect the special features of the Stock Incentive Plan. The cost calculation was based on the following factors:

Black-Scholes option pricing model 1st tranche 2nd tranche 3rd tranche 4th tranche 5th tranche Exercise price (in euros) 63.13 71.23 72.40 57.66 71.28 Expected volatility of the share price (%) 35.0 33.1 32.4 24.7 26.6 Expected volatility of the index (%) 19.7 20.7 22.4 19.4 18.6 Expected lapse rate (%) 3 3 3 4 – Risk-free interest rate (%) 5.19 4.18 4.78 4.27 3.96

The performance period relating to the first tranche of the Stock Incentive Plan launched in 2000 ended on July 10, 2003 and that of the second tranche on July 12, 2004. Hereafter, at any time during a five-year period, the option holders may exercise their right to acquire three Henkel preferred shares per option. The allocation of three shares per option was made solely as a result of the Henkel preferred share outperforming the comparative index (relative performance).

86 Henkel Annual Report 2004 Reinvested intheGroup Paid to Value added Sales/Income Value addedstatement Total Administration Research, developmentandapplicationsengineering Marketing, salesanddistribution Production andengineering insecticides. Dialacquisition Cloroxa resultofthe andthe exchange productportfolio hasexpandedto deal,the include food and This businesssector careproducts,anddishwashingcleaningproducts.As producesandsellsdetergents, laundry Laundry &HomeCare Toiletries, Adhesives, ConsumerandCraftsmen Henkel Technologies andCorporate. operating business. islinked format isby to geographical Group’sinternal management region.Thisclassification ary the systems for its Henkel activitiesofthe Groupby format segmentisby for the businesssector second- reporting The primary andthe (40) Segmentinformation (39) Value addedstatement Employee numbers Annual average excluding apprenticesandtrainees, work experiencestudents andinterns, basedonquarterly figures. (38) Employeenumbers tranche were first exercised.rights fromthe Henkel preferred sharesatDecember31, date. optionshad no valueatthis However, 2004,the in2004someoption ods whichcover four dates Company. weeks the priorto reporting ofthe the The absolute targets performance were notmet.Theoptionsmay beexercised atany time,except duringblocked peri- Other expenses Depreciation/write-ups offixedassets Cost ofmaterials minority shareholders shareholders lenders central andlocalgovernment employees The activities of the HenkelThe activitiesofthe Groupareanalyzed between following &HomeCare,Cosmetics/ the segments: Laundry quoted purchaseprice(exercise the secondtranche agreed washigherthan market price) ofthe As the priceof in millioneuros 2,933 – 3,683 – 1,916 2,940 9,967 411 – 2003 167 203 291 352 11 29.4 – 37.0 – 100.0 4.1 – 12.0 65.2 29.5 0.4 5.6 6.9 9.9 Notes tothefinancialstatements % Henkel Annual Report2004 48,328 13,886 22,296 9,165 2,981 2003 3,328 – 4,450 – 12,830 1,550 2,010 4,199 853 – 2004 185 221 232 1 14,660 23,238 49,947 –25.9 –35.0 100.0 9,205 2,844 2004 6.6 – 36.9 47.9 32.7 4.4 5.3 5.5 % 87 –

Notes to the financial statements Notes to the financial statements

Cosmetics/Toiletries The product range of this business sector comprises hair care, body care, skin care and oral hygiene products, and hair salon products.

Consumer and Craftsmen Adhesives This business sector produces and sells cyanoacrylates, office products for gluing and correcting applications, adhesive tapes, high-strength contact adhesives, and adhesives for home decoration, building and DIY applications.

Henkel Technologies This sector produces and supplies products for adhesives, sealants and surface treatment.

Corporate Group overheads and Central Research costs are incorporated into this segment, together with income and expenses that cannot be allocated to individual business sectors. During the fiscal year, the costs of the Advanced Restructuring measures and impairment losses on goodwill were also included here. In 2004, the segment information by geographical region was brought into line with the management reporting system, so that Germany and Europe are included in one segment. The prior-year figures have been restated accordingly.

Reconciliation between net operating assets/capital employed and balance sheet figures in million euros Balance Net operating assets sheet figures Annual average1) 2004 Dec. 31, 2004 Dec. 31, 2004 Goodwill at book value 2,957 3,284 3,284 Goodwill at book value Other intangible assets and prop- Other intangible assets and property, plant and equipment (total) 2,661 3,078 3,078 erty, plant and equipment (total) 1,038 Financial assets 327 Deferred tax assets Inventories 1,183 1,196 1,196 Inventories Trade accounts receivable Trade accounts receivable from third parties 1,777 1,743 1,743 from third parties Intra-Group trade accounts receivable 565 640 Other receivables and Other receivables and miscellaneous assets2) 384 381 777 miscellaneous assets 1,695 Liquid funds/marketable securities Operating assets (gross) 9,527 10,322 13,138 Total assets – Operating liabilities 2,764 3,144 of which Trade accounts payable Trade accounts payable to third parties 998 1,099 1,099 to third parties Intra-Group trade accounts payable 555 633 Other provisions and Other provisions and other liabilities2) 1,211 1,412 1,991 other liabilities Net operating assets 6,763 7,178 – Goodwill at book value 2,957 3,284 + Goodwill at cost 3,835 4,588 Capital employed 7,641 8,482

1) the annual average is calculated on the basis of the twelve monthly figures 2) only amounts relating to operating activities are taken into account in calculating net operating assets

88 Henkel Annual Report 2004 participation inWella, ExtendedRestructuringmeasures, Clorox share buy-back losses ongoodwill,AdvancedRestructuringmeasures number ofshares inaccordance withtheStockIncentivePlan 74 “Dividendsandinterest millioneuros)inthe paid andreceived” line. Toiletries, 129 millioneurosto Adhesives ConsumerandCraftsmen and365millioneurosto Henkel Technologies. amount,1,927Of this &HomeCarebusinesssector, millioneurosrelates to Laundry the 997millioneurosto Cosmetics/ (previous year: 211 millioneuros)relatingto acquisitions madeinorder businesssectors. to operations ofthe expandthe frominvesting activities/acquisitions cashflow isanamountof3,418 assets”.Alsoincludedinthe of fixed millioneuros repaidCognisloan(413 fundsfromthe lion euros)andthe heading“Proceedsfromdisposals millioneuros)underthe and provisions”. relating to provisions heading“Change Advanced for Restructuring inliabilities measuresisincludedunderthe the implementation Advancedognized asaresultofthe Restructuring measures.An amountof308millioneuros ofthe an amountof89millioneurosrelatingto impairment lossesonproperty, plantand equipment, whichhave beenrec- included inEBITanddepreciationisanamountof242million eurosrelatingto impairment lossesongoodwilland iseliminated “Net gains/losses assets”line.Also inthe fromdisposaloffixed cashflow onthe ofthis posal. Theeffect fromoperating activitiesincludesanamountof1,770Cash flow millioneurosinEBITwhichrelates to gain ondis- the statement for exchange 2004takesThe cashflow ofthe into strategic effects ofthe accountthe investment inClorox. (42) Informationonthecashflowstatement 1) Diluted EPSperpreferred share ineuros Retained profit perpreferred share Dividend perpreferred share preferred shares Number ofpotentialoutstanding EPS perpreferred share ineuros Retained profit perpreferred share Dividend perpreferred share Number ofoutstandingpreferred shares EPS perordinary share ineuros Retained profit perordinary share Dividend perordinary share Number ofordinary shares Retained profit Retained profit perpreferred share Retained profit perordinary share Total dividends Dividends preferred shares Dividends ordinary shares Net earnings pershare Earnings ing for exceptional oneeurocent. items, dilutionislessthan the The Stock Incentive adjust- Plan(Note eurocents.After pershareofthree resultsinadilutionofearnings 37)currently pershare (41) Informationonearnings weighted annualaverageofpreferred shares (Henkelbuy-backprogram) Cash flow from financing activitiesincludes dividendsfromClorox andEcolab of72millioneuros(previous fromfinancing year: Cash flow Clorox fromthe frominvesting exchange activities/acquisitions cashinflow deal(2,282mil- Cash flow includesthe 2) in millioneuros 1) 3) including: earnings attributabletotreasuryincluding: earnings stock 86,598,625 56,891,925 56,891,925 2) weighted annualaverageofpreferred shares adjustedforthepotential minority interests 2003 Earnings after Earnings 3.65 2.45 1.20 3.65 2.45 1.20 3.59 2.45 1.14 352 140 212 167 519 68 99 5) exceptional items2004:exchangeofinvestmentinClorox, impairment 86,598,625 57,005,603 56,894,420 1,554 1,735 12.10 10.80 12.13 10.83 12.07 10.83 2004 1.30 1.30 1.24 616 938 181 107 74 3) Notes tothefinancialstatements Earnings before exceptional items Earnings 4) exceptional items2003:saleof 86,598,625 56,891,925 56,891,925 after minorityinterests Henkel Annual Report2004 2003 3.47 2.27 1.20 3.47 2.27 1.20 3.41 2.27 1.14 326 129 197 167 493 68 99 4) 86,598,625 57,005,603 56,894,420 2004 362 3.82 2.52 1.30 3.82 2.52 1.30 3.76 2.52 1.24 144 218 181 107 543 74 89 3) 5)

Notes to the financial statements Notes to the financial statements

(43) Related party transactions Information required by § 160 (1) No. 8 of the German Corporation Law (AktG): The Company has been notified that since July 8, 2004, a total of 44,583,767 votes, representing in total 51.48 percent of the voting rights in Henkel KGaA are held by: 62 members of the families of the descendants of Fritz Henkel, the Company’s founder, two foundations set up by members of those families, one civil-law partnership set up by members of those families, and 14 private limited companies set up by members of those families and one limited partnership with a limited company as general partner under the terms of a share pooling agreement (agreement restricting the transfer of shares) as envisaged in § 22 (2) of the German Securities Trading Law (WpHG), whereby the shares held by the 14 private limited companies and by the limited partnership representing 17.74 percent are attributed (as envisaged in § 22 (1) No. 1 of the WpHG) to the family members who control those companies.

Jahr Vermögensverwaltung GmbH & Co. KG holds 5,290,000 ordinary shares in Henkel KGaA (6.11 percent of the voting capital of Henkel KGaA), thereby exceeding the threshold of 5 percent of the total voting rights in Henkel KGaA. Jahr Vermögensverwaltung GmbH & Co. KG has undertaken, under the terms of an agreement concluded with the parties to the Henkel share pooling agreement, to exercise its voting rights at the Annual General Meeting of Henkel KGaA in concert with the parties to the Henkel share pooling agreement whenever the latter have decided to cast all their votes in the same way. Under § 22 (2) WpHG, this agreement means that the voting rights in Henkel KGaA held by the parties to the Henkel share pooling agreement and by Jahr Vermögensverwaltung GmbH & Co. KG (which together represent 57.59 percent of the total voting rights) are attributable to each other. As in the case of Jahr Vermögensverwaltung GmbH & Co. KG, the 5 percent threshold of voting rights in Henkel KGaA is exceeded by Mr. Christoph Henkel with voting rights attached to 5,044,139 ordinary shares in Henkel KGaA (representing a rounded percentage of 5.825 percent). No other party to the share pooling agreement has 5 percent or more of the total voting rights in Henkel KGaA, even after adding voting rights expressly granted under the terms of usufruct agreements. Mr. Albrecht Woeste, Düsseldorf, is the authorized representative of the parties to the Henkel share pooling agreement. Members of the families of the descendants of Fritz Henkel, the Company’s founder, who hold shares in Henkel KGaA, and members of the Shareholders’ Committee advanced funds on loan to the Henkel Group in the year under review, on which interest has been payable at an average rate of 2.375 percent (previous year: 2.6 percent). The average total amount of capital advanced to the Henkel Group during the year was 380 million euros (previous year: 456 million euros); the balance at December 31, 2004 was 368 million euros (balance at December 31, 2003: 391 million euros). Members of the Supervisory Board who are not also members of the Shareholders’ Committee advanced funds on loan to the Henkel Group in the year under review averaging 13 million euros (previous year: 13 million euros); the balance at December 31, 2004 was 13 million euros (balance at December 31, 2003: 14 million euros) at an average interest rate of 2.375 percent (previous year: 2.6 percent). As of December 31, 2004, one loan to a member of the Management Board, amounting to 500,000 euros, is included under miscellaneous assets. One loan is secured by a real estate mortgage and has a residual term of 5 years. During the fiscal year, mortgage repayments totaling 100,000 euros were made in respect of this loan. The loan is subject to interest at the German Federal Bank base rate up to a maximum of 5.5 percent. In addition to the above, some companies in the Henkel Group and the associated company Ecolab have supplied goods and services to each other on prevailing market terms during the course of normal business activities.

(44) Emoluments of the corporate bodies The total emoluments (fixed fees, bonus dividends for fiscal 2004 and attendance fees) for members of the Supervisory Board in the year under review amounted to 882 thousand euros (previous year: 805 thousand euros) including value added tax. The members of the Shareholders’ Committee received total emoluments (fixed fees and bonus dividends for fiscal 2004) of 1,670 thousand euros in the year under review (previous year: 1,640 thousand euros).

90 Henkel Annual Report 2004 Total emoluments Option rights(long-termincentive) Total cashremuneration Other emoluments (short-term incentive) Performance-related pay Fixed fees Meeting. undernumberB4724andisalsoavailable inDüsseldorf AnnualGeneral forMunicipal Court inspectionatthe investmentsA list CommercialRegister ofthe heldby the Henkel with atthe KGaA Henkel andthe Groupisfiled (46) Principalsubsidiarycompaniesandgroups ofcompanies Company website (www.ir.henkel.com). Corporation Law German of the (AktG).Thedeclaration available hasbeenmadepermanently to shareholdersonthe Corporate German Governance recommendationsofthe tion ofcompliance §161 the Codeinaccordance with with Board andShareholders’Committee Management approved Board, 2004,the Supervisory ajointdeclara-In February Code (45) DeclarationofcompliancewiththeGermanCorporate Governance subject to Federal interest German Bankbaserate atthe upto amaximumof5.5percent. secured by arealestate mortgage, amounted to euros(previous year: euros).Theloanis 500thousand 600thousand (previous year: euros). 6,859thousand ecessor, year survivingdependents.Amountspaidduringthe underreview andtheir totaled euros 3,700thousand to Management former Board membersofthe ofHenkel KGaA former managingdirectors andthe ofits legal pred- Henkel preferred sharesatDecember31, date. optionshadnovalueatthis 2004,the blocked periodswhichcover four dates Company. weeks the priorto reporting ofthe the years. aperiodoffive Therightscanbeexercisedpreferred sharesperoptionrightwithin at any timeexcept during Management Board date, membersofthe ofHenkel this the KGaA2004. After areentitledto acquire Henkel three Stock secondtranche periodforThe performance ofoptionsinthe the Incentive Plansetupin2000endedonJuly 12, Total emoluments down oftotal emolumentsisshown tablebelow. inthe eurosgranted Stockrights valuedat666thousand in2004underthe Incentive Plan(long-term incentive). Abreak- business resultsachieved ledto anincreaseinperformance-related pay. Total emolumentsalsoinclude12,600 option year was13,513KGaA fiscal andatsubsidiariesinthe euros(previous year: thousand 11,650 euros).Thegood thousand will bepresented for approval 2005AnnualGeneral Meeting. atthe 2004andprevious years. respecttobased onlong-term Anew businesssuccesswith fiscal long-term pay component Shareholders’ Committeeand ofthe have decidedto waive any valuecreationrightsasaremuneration component Board Supervisory components membersofthe the whicharedependentonshareprices.Against background, this admissibilityofremuneration Federal issueofthe hasraised German the SupremeCourt The recentdecisionofthe The loanto Management Board, amemberofthe includedundermiscellaneousassetsatDecember31, 2004and A total euros(previous year: euros)hasbeenprovided of45,437thousand 45,890thousand for pensionobligations purchaseprice(exercise quoted agreed the secondtranche price)forAs the washigherthan market the pricefor The total remuneration dutiesatHenkel paidto Management oftheir Board membersofthe performance for the in thousandeuros 11,650 10,645 7,168 3,204 1,005 2003 273 100.0 61.5 27.5 8.6 2.4 % Notes tothefinancialstatements Henkel Annual Report2004 12,847 13,513 9,162 3,335 2004 666 350 100.0 67.8 24.7 4.9 2.6 % 91

Notes to the financial statements Notes to the financial statements

(47) Participations in associated companies

Ecolab Inc., St. Paul, Minnesota, USA Product groups: Products and services for industrial and institutional hygiene, textile hygiene, vehicle cleaning and automotive care, water treatment, pest control, commercial kitchen service. Henkel owns 72.7 million shares in Ecolab Inc., which represents a participating interest of 28.2 percent. We expect a 10 percent increase in sales to 4.1 billion US dollars in fiscal 2004. The share price of Ecolab rose by 27.9 percent in 2004. The market value of our participation at December 31, 2004 was 2,544 million US dollars (previous year: 1,990 million US dollars). This is equivalent to 1,867 million euros (previous year: 1,575 million euros).

(48) Events after the balance sheet date In the first days of January, we announced extensive restructuring measures in various companies in the Sovereign Group acquired by Henkel in December 2004 (see Note 16). On January 13, 2005, we informed the legally responsible corporate body of our French subsidiary Henkel France S.A. of our intention (“projet”) to close the detergents site in Reims. These measures and initiatives will result in charges against earnings, the effects of which are deemed to be immaterial in relation to the earnings for the fiscal year.

(49) Information required by § 292a HGB (German Commercial Code) The requirements set out in § 292a (1) HGB have been met, allowing the preparation of the consolidated financial statements of Henkel KGaA in accordance with International Financial Reporting Standards (IFRS). The departures from German law which apply to Henkel relate to the recognition of translation differences as income or expenses in the period in which they arise, the recognition of unused tax loss carry-forwards as deferred tax assets, the measurement of financial instruments at their fair values, the cessation of scheduled amortization of goodwill of and other intangible assets with indefinite useful lives (for acquisitions on or after March 31, 2004), the capitalization of internally-generated intangible assets.

92 Henkel Annual Report 2004 The Management Board ofHenkel KGaA 28,2005 January Düsseldorf, duced onpage 96. Board isrepro- Supervisory ofthe Board purpose.The report heldfor that Supervisory present, atameetingofthe have auditors auditreport cial statements, the Groupmanagement andthe beendiscussedindetail,with report the statements Groupmanagement Theauditors’ isreproducedonpage report. andthe report 97. Theconsolidated finan- Board, hasaudited consolidated AnnualGeneral the financial Meetingandasinstructeders atthe Supervisory by the CorporateGerman Governance Code. Shareholders’Committeethe have approved ajointdeclaration recommendationsofthe ofcompliance the with toward employees, inwhichHenkel operates. country environmentinevery societyandthe on principlesofsustainable development interests inthe ofshareholdersandinfullawareness ofitsresponsibility individualcompany andinthe statementsment report incorporated financial therein. statements foundation consolidated accuracy forthe ofinformation andGroupmanage- disclosedinthe financial the appropriateGroup arerecognizedingoodtimeandthat requirements ofcompany law, any that developments futureofHenkel whichcouldendanger the KGaA Henkel orofthe arrangements occur. to asthey nize changes ensuingrisks assetsandfinancial inbusinesscircumstances andthe Management allbusinesstransactions. They Board alsoenablethe to recog- records properly reflect financial the that controlsystemsthe arekept Internal underconstant Audit Groupby review the acrossthe department. of monitored Management by Board. reliabilityandfunctionalefficiency the Compliance regulationsandthe with ment andprinciplesstrategies Company. developed the within principlesiscontinually Compliance these with to requiredare suitably qualified meetthe standards. training Staff iscentered Company’s aroundthe missionstate- statements. consolidated Appropriatethe financial training isprovided to employees the make surethat responsible relevant legal regulationsby establishing effective internal controlsystems companies atthe whichareincludedin Standards (IFRS),formerly known asInternational Accounting Standards (IAS). management have reports ments andthe beenunanimously approved Management Board. membersofthe by the state- statements, consolidatedcial statements the financial Groupmanagement Theannualfinancial report. andthe ofHenkelThe personally liablemanagingpartners KGaA consolidated preparation areresponsiblefor ofthe finan- the Statement bytheManagementBoard KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft, in accordance with aresolutionadopted inaccordance with by Aktiengesellschaft, sharehold- KPMG DeutscheTreuhand-Gesellschaft As required by §161 Board and Corporation Law German Management Supervisory Board, ofthe (AktG),the the The Management Board iscommitted to delivering asteady increaseinshareholdervalue.TheGroupismanaged Our riskmanagement systems inplacefor Henkel KGaA Henkel the andthe Groupensure,inaccordance with proceduresbased reporting These measures,coupledwith The Management Board hastaken steps processandcompliance reporting the to integrity of the with ensurethe statementsThe consolidated have financial basisofInternational Financial Reporting beenpreparedonthe measurescanbetaken wherenecessary. Thisalsoprovides on standard guidelines throughout the Group,ensure the on standard guidelinesthroughout Notes tothefinancialstatements Henkel Annual Report2004 93

Notes to the financial statements Notes to the financial statements

Recommendation for approval of the annual financial statements and appropriation of the profit of Henkel KGaA It is proposed that the annual financial statements be approved as presented and that the unappropriated profit of 184,586,207.50 euros for the year ended 31 December 2004 be applied as follows: a) Payment of a dividend of 1.24 euros per ordinary share on 86,598,625 shares = 107,382,295.00 euros b) Payment of a dividend of 1.30 euros per preferred share on 59,387,625 shares = 77,203,912.50 euros = 184,586,207.50 euros

Treasury stocks are not entitled to dividend. The amount in unappropriated profit which relates to the shares held by the Company at the date of the Annual General Meeting is transferred to other revenue reserves.

Düsseldorf, January 28, 2005

The personally liable managing partners of Henkel KGaA

Prof. Dr. Ulrich Lehner (Chairman of the Management Board) Dr. Jochen Krautter Dr. Klaus Morwind Prof. Dr. Uwe Specht

94 Henkel Annual Report 2004 3) 2) 1) Total equityandliabilities Liabilities Provisions Special accountswithreserve element Shareholders’ equity Total assets Current assets Liquid funds/Marketablesecurities Treasury stock Receivables andmiscellaneousassets/Deferred charges Inventories Fixed assets Financial assets Property, plant&equipmentandintangibleassets Balance Sheet Unappropriated profit Allocation torevenue reserves Net earnings Taxes onincome before tax Earnings Change inspecialaccountswithreserve element Financial items Operating profit Exceptional items: Other income(netofotherexpenses) Selling, research andadministrativeexpenses Gross profit Cost ofsales Sales Statement ofIncome Financial statementsofHenkelKGaA(summarized) and filedwiththeCommercial RegisterinDüsseldorf;copiescanbeobtainedfrom Henkel KGaAonrequest the fullfinancialstatementsofHenkelKGaAwithauditors’unqualifiedopinion are publishedintheBundesanzeiger(German statement ofincomefigures are rounded; unappropriated profit 166,992,742.50euros for2003and184,586,207.50 euros for2004 the allocationofcoststoindividualfunctionswasrevised in2004;figures fortheprevious yearhavebeenrestated Costs ofExtendedRestructuring/AdvancedRestructuring Sale ofparticipationinWella in millioneuros in millioneuros 3) Notes tothefinancialstatements Dec. 31,2003 Henkel Annual Report2004 –1,788 971 – 2,707 8,978 3,167 1,572 4,031 8,978 3,645 1,073 2,244 5,333 4,935 2003 –26 –24 –20 187 213 128 123 919 208 154 174 398 167 13 72 81 2) 2) FederalGazette) Dec. 31,2004 10,029 10,029 –1,000 –1,774 4,021 1,721 4,051 4,158 3,793 5,871 5,276 2,664 2004 –36 –52 –86 236 158 174 595 187 223 258 144 890 185 –2 33 17 95 – 1)

Notes to the financial statements Notes to the financial statements

Report of the Supervisory Board

During the course of fiscal 2004, the Supervisory Board monitored and advised the Management Board, as required by law and the Company’s articles of association. The Management Board has kept the Supervisory Board up to date and fully informed about the progress of the Company and all material business transactions. Sales and earnings of the Henkel Group as a whole and of each business sector and geographical region have been presented in the Group’s quarterly reports. In addition, the Chairman of the Supervisory Board was in regular contact with the Chairman of the Management Board outside board meetings, discussing important questions of Company policy and business performance. Four meetings were held during the year, at which joint deliberations with the Management Board focused on important individual projects and courses of action, and on strategic issues. As well as current business performance, the following matters were discussed in detail: Corporate strategy Short-term and long-term corporate and financial planning Human resource strategies and policies

In its discussions advising on corporate strategy, the Supervisory Board concentrated in particular on the future direction of The Dial Corporation, USA. Topics considered were the further expansion of the brands business in the United States and Asia through the acquisition of relevant business activities from The Clorox Company, USA, in exchange for Henkel’s previous 28.8 percent participation in Clorox, and also the acquisition of the US adhesives company Sovereign Specialty Chemicals, Inc. Other focuses for discussion were the development of Henkel’s industrial business, the situation in the German detergents market and the Advanced Restructuring measures. The annual financial statements of Henkel KGaA for the year ended December 31, 2004 and the consolidated financial statements and management reports, including the accounting records from which they were prepared, have been examined by the auditors appointed at the last Annual General Meeting, KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschafts- prüfungsgesellschaft, Berlin and Frankfurt am Main (“KPMG”), and given an unqualified audit opinion. KPMG reports that the annual financial statements give a true and fair view of the net assets, financial position and results of operations of Henkel KGaA in accordance with German principles of proper accounting, and that the consolidated financial statements give a true and fair view of the net assets, financial position and results of operations of the Group and of its cash flows for the year under review, and comply with International Financial Reporting Standards. KPMG further confirmed that the consolidated financial statements and Group management report for the year under review meet the requirements for exemption from the duty to prepare consolidated financial statements under German company law. All the financial statement documentation and the recommendation by the personally liable managing partners for the appropriation of profit, as well as the audit reports of KPMG, have been laid before the Supervisory Board. They have been examined by the Supervisory Board and, at a meeting on February 15, 2005, discussed in the presence of the auditors, who reported on their main audit findings. This was coupled with a discussion about Henkel’s risk management procedures. The risk management system meets the legal requirements; there was no evidence of any risks which could endanger the continued existence of the Group as a going concern. At this meeting, the proposed resolutions for the Annual General Meeting and the joint Declaration of Compliance with the German Corporate Governance Code to be made by the Management Board, Shareholders’ Committee and Supervisory Board for 2005 were also discussed and approved. The Supervisory Board concurs with the auditors’ findings and, after concluding its own examination, has no reservations. At its meeting held on February 15, 2005, the Supervisory Board endorsed the annual financial statements, the consolidated financial statements and the management reports as well as the recommendation for the appropriation of the net earnings for the year. The Supervisory Board has also endorsed the recommendation by the personally liable managing partners for the appropriation of profit. Dr. h.c. Jürgen Walter retired from the Supervisory Board effective September 30, 2004, having been a member since 1984. The Supervisory Board paid tribute to Dr. Walter for his contribution. His place was taken by Mrs Andrea Pichottka, who was appointed as a member of the Supervisory Board on the basis of a decree issued by the Düsseldorf Municipal Court on October 26, 2004. The Supervisory Board would like to thank the Management Board and all Henkel employees for their hard work in 2004.

Düsseldorf, February 15, 2005

The Supervisory Board Dipl.-Ing. Albrecht Woeste (Chairman)

96 Henkel Annual Report 2004 itcatpüe Wirtschaftsprüfer Günter Nunnenkamp Wirtschaftsprüfer Rüdiger Reinke Wirtschaftsprüfungsgesellschaft Aktiengesellschaft KPMG DeutscheTreuhand-Gesellschaft 28,2005 January Düsseldorf, company German and aGroupmanagement inaccordance with report law.” conditionsrequired2004 satisfythe Company’s for the exemption fromitsdutyto statements prepareconsolidated financial statements Groupmanagement year for consolidated report andthe the the financial endedDecember31, that we confirm Group’soveralla suitableunderstanding ofthe offuturedevelopment. risks positionandsuitably Inaddition, presentsthe hasnotledtopersonally liable managingpartners, any Groupmanagement provides report reservations.Inouropinion,the Standards.cial Reporting businessyear for International the Finan- inaccordance with Henkelresults ofoperations ofthe Groupandofitscashflows statements.solidated We financial believe ourauditprovides that areasonablebasisfor ouropinion. estimates aswell personally madebynificant liablemanagingpartners, overall the asevaluating the con- presentation ofthe frameworkined onatest accountingprinciplesusedandsig- the audit.Theauditincludesassessingthe basiswithin of the statements consolidated isexam- amountsanddisclosuresinthe financial the of auditprocedures.Theevidence supporting Henkelin whichthe Groupoperates andevaluations ofpossiblemisstatements aretaken into determination accountinthe ments arefreeofmaterial misstatements. Knowledge economicandlegal environment businessactivitiesandofthe ofthe state- consolidated the financial reasonableassurance whether itcanbeassessedwith auditsuchthat the plan andperform compliance(IDW) International Standards with andinsupplementary onAuditing (ISA).Thosestandards require we that erally statements accepted standards promulgated German auditoffinancial for the Institut by derWirtschaftsprüfer the statements consolidated basedonouraudit. ion onthe financial ofHenkelpersonally liablemanagingpartners aufAktien.Ourresponsibilityisto Kommanditgesellschaft expressanopin- statementsdated International Financial Standards inaccordance Reporting financial with responsibilityofthe (IFRS)arethe statements. andnotesincome, changes Thepreparation to financial inequityandcontent consoli- the ofthe andcashflows, yearfor the endedDecember31, 2004,comprising consolidated related the balancesheetandthe consolidated statements of “We have statements audited consolidated preparedby the financial Henkel aufAktien(“Henkel”) Kommanditgesellschaft Auditors’ Report Our audit,whichalsoextended to Groupmanagement year for report the the endedDecember31, 2004preparedby the positionand statements consolidated netassets,financial giveIn ouropinion,the financial andfairview ofthe atrue We statements auditregulationsandgen- conducted consolidated German inaccordance ourauditofthe financial with Notes tothefinancialstatements Henkel Annual Report2004 97

Notes to the financial statements Notes to the financial statements

Corporate Management of Henkel KGaA Boards/memberships as defined by § 125(1), sentence 3, German Corporation Law (AktG) as at January 2005

Supervisory Board Membership of statutory Membership of supervisory boards comparable supervisory bodies Dipl.-Ing. Albrecht Woeste Allianz Lebensvers.-AG, R. Woeste & Co. GmbH & Co. KG Chairman, Deutsche Bank AG Private Investor, Düsseldorf Born in 1935 Member from June 27, 1988 Winfried Zander Vice-Chairman, Chairman of the Works Council of Henkel KGaA, Düsseldorf Born in 1954 Member from May 17, 1993 Dr. Simone Bagel-Trah Private Investor, Düsseldorf Born in 1969 Member from April 30, 2001 Hans Dietrichs Chairman of the Works Council of Henkel Genthin GmbH, Genthin Born in 1943 Member from May 4, 1998 Benedikt-Joachim Freiherr von Herman Holzhof Oberschwaben eG Forester, Wain Born in 1941 Member from December 3, 1990 Bernd Hinz Vice-Chairman of the Works Council of Henkel KGaA, Düsseldorf Born in 1951 Member from May 4, 1998 Prof. Dr. Dr. h.c. mult. Heribert Meffert BASF Coatings AG, UNIPLAN International GmbH & Co. KG Former Director of the Institute of Kaufhof Warenhaus AG Marketing, University of Münster; Chairman of the Executive Board of Bertelsmann Foundation, Münster Born in 1937 Member from May 4, 1998 Andrea Pichottka Siltronic AG (from October 26, 2004) HQ Organizations and Advertising Manager at IG Bergbau, Chemie, Energie, Hanover Born in 1959 Member from October 26, 2004 Prof. Dr. Dr. h.c. mult. Altana AG, HBM BioVentures AG, Switzerland, Heinz Riesenhuber Evotec OAI AG (Chairman), Heidelberg Innovation BioScience, Former Federal Minister for Research Frankfurter Allgemeine Zeitung GmbH, Venture II GmbH & Co. KG and Technology, Frankfurt am Main InSynCo AG (Vice-Chairman), Born in 1935 Kabel Deutschland GmbH (Chairman), Member from May 4, 1998 VfW AG (Vice-Chairman), Vodafone GmbH

98 Henkel Annual Report 2004 Member from October9,2002 in1953 Born Henkel KGaA,Düsseldorf Member oftheWorks Councilof Rolf Zimmermann Member from May4,1998 in1958 Born Staff ofHenkelKGaA Representative oftheSenior Chemist, Düsseldorf Dr. AnnelieseWilsch-Irrgang Member from April14,2003 in1946 Born Bayer AG,Leverkusen Chairman oftheExecutiveBoard of Werner Wenning Member from January1,2000 in1950 Born Henkel KGaA,Düsseldorf Member oftheWorks Councilof Brigitte Weber Member from February27,1984 in1945 Born Chemie, Energie, Hanover of IGBergbau, Member oftheExecutiveCommittee (to September30,2004) Dr. h.c.JürgenWalter Member from May4,1998 in1942 Born Frankfurt amMain Former ChairmanofDresdner BankAG, WalterBernhard Member from May4,1998 in1964 Born Chemie, Energie, Hanover of IGBergbau, Member oftheExecutiveCommittee Michael Vassiliadis Member from May4,1998 in1936 Born Private Investor, St.Gallen,Switzerland Heinrich Thorbecke Supervisory Board (continued) supervisory boards Membership ofstatutory Beteiligungs AG Versicherungs-Gerling-Konzern RWE UmweltAG BASF SchwarzheideGmbH, Wintershall AG(Vice-Chairman) Meissen GmbH, Staatliche Porzellan-Manufaktur mg technologiesag, Deutsche Telekom AG, DaimlerChrysler AG, Bilfinger Berger AG, mg technologiesag K+S KaliGmbH(Vice-Chairman), K+S AG(Vice-Chairman), BASF AG, (Chairman ofExecutiveCommittee) KG AllgemeineLeasingGmbH&Co. Kursana AG,Switzerland Intervalor HoldingAG,Switzerland, In GassenImmobilienAG,Switzerland, comparable supervisorybodies Membership of Notes tothefinancialstatements Henkel Annual Report2004 99

Notes to the financial statements Notes to the financial statements

Shareholders’ Committee Membership of statutory Membership of supervisory boards comparable supervisory bodies Dipl.-Ing. Albrecht Woeste Allianz Lebensvers.-AG, R. Woeste & Co. GmbH & Co. KG Chairman, Deutsche Bank AG Private Investor, Düsseldorf Born in 1935 Member from June 14, 1976 Stefan Hamelmann Ecolab Inc., USA Vice-Chairman (from June 23, 2004) Private Investor, Düsseldorf Born in 1963 Member from May 3, 1999 Christoph Henkel Henkel Corp., USA Vice-Chairman Private Investor, London Born in 1958 Member from May 27, 1991 Dr. Jürgen Manchot LTS Lohmann Therapie-Systeme AG (died April 29, 2004) Vice-Chairman, Chemist, Düsseldorf Born in 1936 Member from January 1, 1975 Dr. Paul Achleitner Bayer AG, ÖIAG, Austria Member of the Board of Allianz AG, MAN AG (Second Vice-Chairman), Munich RWE AG Born in 1956 Group mandate: Member from April 30, 2001 Allianz Global Investors AG, Allianz Immobilien GmbH (Chairman) Dr. h.c. Ulrich Hartmann Deutsche Bank AG, ARCELOR S.A., Luxembourg Former Chairman of the Board Deutsche Lufthansa AG, of E.ON AG, Düsseldorf E.ON AG (Chairman), Born in 1938 Hochtief AG, Member from May 4, 1998 IKB Deutsche Industriebank AG (Chairman), Münchener Rückversicherungs- Gesellschaft AG Burkhard Schmidt Druck- und Verlagshaus Jahr Top Special Verlag Managing Director of Gruner + Jahr AG GmbH & Co. KG (Chairman) Jahr Vermögensverwaltung GmbH & Co. KG, Hamburg Born in 1960 Member from June 23, 1999 Konstantin von Unger Ten Lifestyle Management Ltd., UK Partner, Blue Corporate Finance, London Born in 1966 Member from April 14, 2003

100 Henkel Annual Report 2004 1) Member from January1,2002 in1947 Born Consumer andCraftsmenAdhesives Alois Linder Member from June15,1992 in1942 Born Henkel Technologies Dr. JochenKrautter Member from April1,1995 in1946 Born Chairman Prof. Dr. UlrichLehner Management Board Human Resources Committee Finance Committee Sub-committees oftheShareholders’ Committee Member from May8,2000 in1937 Born Düsseldorf Officer ofHenkelKGaA, Former President andChiefExecutive Dr. Hans-DietrichWinkhaus Member from May6,2002 in1941 Born Amsterdam Executive Board ofHeinekenN.V., Former Chairmanofthe Karel Vuursteen Shareholders’ Committee Personally liablemanagingpartner 1) 1) (continued) HSBC Trinkaus &Burkhardt KGaA E.ON AG, supervisory boards Membership ofstatutory auditing andcorporateriskmanagement. taxation andaccountingpolicy, internal including thestatutoryyear-end audit, with financialmatters,accountingissues The FinanceCommitteedealsprincipally Functions BASF CoatingsAG strategy andremuneration. issues relating tothehumanresources members oftheManagementBoard, principally withpersonnelmattersfor The HumanResources Committeedeals Schwarz-Pharma AG(Chairman) Ergo Versicherungsgruppe AG, Deutsche LufthansaAG, Degussa AG, BMW AG, supervisory boards Membership ofstatutory Dr. Hans-DietrichWinkhaus Burkhard Schmidt Dr. PaulAchleitner Stefan Hamelmann,Vice-Chairman Christoph Henkel,Chairman Members Royal Aholdnv, Netherlands ING Groep nv, Netherlands, Heineken HoldingN.V., Netherlands, Akzo Nobelnv, Netherlands, AB Electrolux, Sweden, comparable supervisorybodies Membership of Henkel Corp.,USA Ecolab Inc.,USA Novartis AG,Switzerland Henkel ofAmericaInc.,USA(Chairman), Henkel Corp.,USA(Chairman), Ecolab Inc.,USA, Dial Corp.,USA(Chairman), comparable supervisorybodies Membership of Karel Vuursteen Dr. h.c.UlrichHartmann Konstantin vonUnger, Vice-Chairman Dipl.-Ing. Albrecht Woeste, Chairman Notes tothefinancialstatements (as atDecember31,2004) Henkel Annual Report2004 101

Notes to the financial statements Notes to the financial statements

Management Board (continued) Membership of statutory Membership of supervisory boards comparable supervisory bodies Dr. Klaus Morwind 1) Henkel Central Eastern Europe Laundry & Home Care Ges.mbH, Austria, Born in 1943 Henkel Ibérica S.A., Spain Member from January 1, 1991 Prof. Dr. Uwe Specht 1) Henkel & Cie AG, Switzerland Cosmetics/Toiletries Born in 1943 Member from May 6, 1985 Dr. Lothar Steinebach Ashwa Adhesives Industries Ltd., Finance Saudi Arabia, Born in 1948 Dial Corp., USA, Member from July 1, 2003 Dial Holdings, Inc., USA, Henkel Adhesives Middle East E.C., Bahrain, Henkel Corp., USA, Henkel Ltd., UK, Henkel China Investment Co. Ltd., China, Henkel Technologies Egypt SAE, Egypt Knut Weinke cc-Hubwoo.com S.A., France, Human Resources/Logistics/ Dial Corp., USA, Information Technologies Henkel Belgium S.A., Belgium, Born in 1943 Henkel France S.A., France, Member from January 1, 2002 Henkel Nederland B.V., Netherlands, Henkel Norden AB, Sweden

1) Personally liable managing partner

Operating Management of Henkel KGaA

Dr. Franz-Josef Acher Hans Van Bylen Heinrich Grün Andreas Lange Law Hair Care/Cosmetics Transportation/Electronics Special Detergents Overseas and North America Technologies International Dr. Ramón Bacardit Operations/Research Gunter Effey Wolfgang Haumann Dr. Angela Paciello Technologies Holthausen Plant Services Detergents Production Supply Skin Care/Oral Care/ Chain (to December 31, 2004) Cosmetics Central Europe Alain Bauwens Jean Fayolle Cleaners Industrial Division Dr. Peter Hinzmann Jürgen Seidler Technologies Information Technologies Detergents International Wolfgang Beynio Finance/Controlling Dr. Wolfgang Gawrisch Dirk-Stephan Koedijk Stefan Sudhoff (from January 1, 2005) Research/Technology Human Resources Body Care/Fragrances/ Management Cosmetics Western and Pierre Brusselmans Southern Europe/MENA Corporate Development As at January 1, 2005

102 Henkel Annual Report 2004 Dr. ThomasFoerster Thomas Feldbrügge Marcelo Estivill Mohamed Elmasry Stephen J.Ellis Dr. HorstEierdanz Wolfgang Eichstaedt Eric Dumez Peter Dowling Dr. AlexanderDitze Serge Delobel Paul deBruecker Jesus Cuadrado Francisco Cornellana Jürgen Convent Bertrand Conqueret Julian Colquitt Michael JamesClarkson Dundar Ciftcioglu Dr. PeterChristophliemk Marco Cassoli Eberhard Buse Dr. Andreas Bruns Daniel Brogan Hanno Brenningmeyer Robert Bossuyt Willem Boomsluiter Dr. JoachimBolz Karl Bethell Antonio Beraza Marc Benoit Francisco Beltran Harald Bellm Pietro Beccari Michael Beard Georg Baratta-Dragono Faruk Arig Giacomo Archi Management Circle IWorldwide Hanno-Hagen Mietzner Joris Merckx Lutz Mehlhorn Dr. KlausMarten Dr. CarloMackrodt Oliver Luckenbach Sammy Loutfy Luis CarlosLacorte Thomas-Gerd Kühn Dr. Werner Krieger Gerald Kohlsmith Peter Kohl Dr. HaraldKöster Nurierdem Kocak John Knudson Dr. Wolfgang Klauck Dr. KlausKirchmayr Peter Kardorff Patrick Kaminski John Kahl Theo Janschuk Dr. JoachimJäckle Dr. JochenJacobs Dr. Hans-Georg Hundeck Dr. StefanHuchler Michael Horstmann Dr. AloisHoeger Ludger Hazelaar Dr. HubertHarth Ferdinand Harrer Rainer M.Haertel Bartholomew Griffin Ralf Grauel Dr. KarlW. Gladt Pierre Gibaud Roberto Gianetti Holger Gerdes Dr. AttilioGatti Ernst Primosch Ernst Dr. Wolfgang Preuß Michael Prange Dr. ChristianPoschik Ingomar Poppek Kenneth Pina Picker Arnd Bruno Piacenza Norbert Pestka Campbell Peacock Luis PalauAlmenar Carlos Eduardo Orozco Michael Ogrinz Helmut Nuhn Christoph Neufeldt Liam Murphy Aloys Schmeken Rolf Schlue Gerhard Schlosser Wolfgang Scheiter Wolfgang Schäufele Anavangot Satishkumar Peter Ruiner Robert Risse Dr. MichaelReuter William Read Dr. Volker Puchta Julio Munoz-Kampff Rob Muir Rolf Münch Dr. ThomasMüller-Kirschbaum Tina Müller Dr. HeinrichMüller Georg Müller Juan Morcego Eric Moley Dr. ClemensMittelviefhaus David Minshaw Notes tothefinancialstatements Bart Steenken Dr. FriedrichStara Andrew Smith Dr. SimoneSiebeke Dr. JohannSeif Dr. Hans-WilliSchroiff Dr. MatthiasSchmidt Dr. RainerVogel Ramon Viver Dr. Vincenzo Vitelli Viviane Verleye Robert Uytdewillegen Rainer Tschersig Patrick Trippel Thomas Tönnesmann Günter Thumser Dr. BorisTasche Dr. Walter Sterzel As atJanuary1,2005 Daniel Ypersiel Dr. RudolfWittgen Dr. Hans-ChristofWilk Dr. WinfriedWichelhaus Dr. Jürgen Wichelhaus Klaus-Dieter Weyers Thomas Wetherell Andreas Welsch Gabriele Weiler Claus Weigandt WasserrabBernd Kim Walker Dr. DirkVollmerhaus Henkel Annual Report2004 103

Notes to the financial statements Further information

Henkel Group: Financial Highlights by Quarter in million euros 1st quarter 2nd quarter 3rd quarter 4th quarter 2003 2004 2003 2004 2003 2004 2003 2004 Sales Laundry & Home Care 779 750 780 938 771 970 744 959 Cosmetics/Toiletries 490 503 547 661 509 649 540 664 Consumer and Craftsmen Adhesives 319 343 310 365 351 395 333 343 Henkel Technologies 674 681 666 728 665 695 661 687 Corporate 75 66 75 64 75 63 72 68 Henkel Group 2,337 2,343 2,378 2,756 2,371 2,772 2,350 2,721 EBITA Laundry & Home Care 71 70 77 88 73 94 74 99 Cosmetics/Toiletries 51 51 62 82 53 69 62 89 Consumer and Craftsmen Adhesives 37 41 36 41 47 50 38 37 Henkel Technologies 63 71 72 85 59 69 66 74 Corporate –22 –28 –35 –34 –28 –30 – 25 1,344 Henkel Group 200 205 212 262 204 252 215 1,643 Corporate (before exceptional items)1) –22 –28 –35 –34 –24 –30 –25 –18 Henkel Group (before exceptional items)1) 200 205 212 262 208 252 215 281 EBIT Laundry & Home Care 69 69 75 67 71 82 72 82 Cosmetics/Toiletries 42 42 54 61 44 52 54 70 Consumer and Craftsmen Adhesives 33 37 31 35 43 46 34 32 Henkel Technologies 46 55 55 69 42 52 51 59 Corporate –22 –28 –35 –34 –28 –30 – 25 1,102 Henkel Group 168 175 180 198 172 202 186 1,345 Corporate (before exceptional items)1) –22 –28 –35 –34 –24 –30 –25 –18 Henkel Group (before exceptional items)1) 168 175 180 198 176 202 186 225 Earnings before tax 177 186 193 205 183 200 215 1,330 Earnings before tax and exceptional items1) 177 186 193 205 187 200 185 210 Net earnings for the quarter 116 129 127 135 121 135 166 1,337 Net earnings for the quarter before exceptional items1) 116 129 127 135 125 135 136 145 Earnings per preferred share before amortization of goodwill in euros 1.05 1.10 1.08 1.37 1.05 1.27 1.34 11.47 Earnings per preferred share before amortization of goodwill and exceptional items1) in euros 1.05 1.10 1.08 1.37 1.08 1.27 1.13 1.47 Earnings per preferred share in euros 0.83 0.89 0.86 0.92 0.82 0.92 1.14 9.40 Earnings per preferred share before exceptional items1) in euros 0.83 0.89 0.86 0.92 0.85 0.92 0.93 1.09

1) exceptional items 2003: sale of participation in Wella, Extended Restructuring measures, Clorox share buy-back exceptional items 2004: exchange of investment in Clorox, impairment losses on goodwill, Advanced Restructuring measures

104 Henkel Annual Report 2004 Henkel Group: Ten-Year Summary in million euros 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Sales 7,259 8,335 10,259 10,909 11,361 12,779 9,4108) 9,656 9,436 10,592 Operating profit (EBIT) 371 517 702 791 857 950 6028) 666 706 80020) Earnings before tax 359 454 1,001 644 692 816 73410) 664 768 80120) Net earnings 250 284 3205) 372 404 505 4769) 431 53014) 54420) Earnings after minority interests 222 248 287 336 364 468 43710) 435 51915) 54320) Earnings per preferred share (EPS) 1.551) 1.74 3.766) 2.33 2.53 3.25 3.5011) 3.06 3.6516) 3.8220) Total assets 5,941 7,311 8,905 9,130 9,856 11,382 9,365 8,513 9,362 13,138 Fixed assets 3,351 4,012 5,040 5,164 5,504 6,295 5,490 4,927 4,723 7,400 Current assets (including deferred tax assets) 2,590 3,299 3,865 3,966 4,352 5,087 3,875 3,586 4,639 5,738 Debt 3,741 4,786 6,061 6,301 6,618 7,882 5,761 5,150 5,976 8,534 Shareholders’ equity2) 2,200 2,525 2,844 2,829 3,238 3,500 3,604 3,363 3,386 4,604 as % of total assets 37.0 34.5 31.9 31.0 32.9 30.8 38.5 39.5 36.2 35.0 Net return on sales (%)3) 3.4 3.4 5.6 3.4 3.6 4.0 3.613) 4.5 5.617) 5.120) Return on equity (%)4) 12.3 12.5 13.17) 13.1 14.3 15.6 13.610) 12.0 15.818) 16.120) Dividend per ordinary share in euros 0.54 0.61 0.69 0.79 0.87 1.06 1.06 1.06 1.14 1.2412) Dividend per preferred share in euros 0.59 0.66 0.74 0.84 0.93 1.12 1.12 1.12 1.20 1.3012) Total dividends 82 93 104 119 131 157 156 156 167 18512) Capital expenditures (incl. financial assets) 1,078 833 2,127 979 746 1,359 6648) 484 58019) 4,628 Investment ratio as % of sales 14.9 10.0 20.7 9.0 6.6 10.6 5.3 5.1 6.1 43.7 Research and development costs 189 197 238 250 279 320 2558) 259 257 272 Number of employees (annual average) Germany 14,684 15,473 15,138 15,257 15,065 15,408 11,1218) 10,944 10,767 10,488 Abroad 27,044 30,904 38,615 41,034 41,555 45,067 36,2418) 36,259 37,561 39,459 Total 41,728 46,377 53,753 56,291 56,620 60,475 47,362 8) 47,203 48,328 49,947

1) calculated on the basis of HGB, from 1996 on the basis of IFRS 2) including participating certificates and participating loans up to 1996 3) net earnings ÷ sales 4) net earnings ÷ average equity capital (from 1997 equity capital at beginning of year) 5) 576 million euros including gain from sale of GFC shareholding (Degussa) 6) excluding gain from sale of GFC shareholding, preferred share: 1.99 euros 7) excluding gain from sale of GFC shareholding (Degussa) 8) continuing businesses 9) 541 million euros including net gain from exceptional items 10) before exceptional items 11) after the sale of Cognis and Henkel-Ecolab: 3.05 euros 12) proposed 13) net earnings ÷ sales of 13,060 million euros 14) net earnings excluding Clorox share buy-back: 500 million euros 15) earnings after minority interests excluding Clorox share buy-back: 489 million euros 16) before exceptional items in 2003: sale of stake in Wella; Extended Restructuring measures and Clorox share buy-back: 3.47 euros 17) net return on sales excluding Clorox share buy-back: 5.3 percent 18) return on equity excluding Clorox share buy-back: 14.9 percent 19) excluding Wella proceeds of 280 million euros 20) before exceptional items

Pages 12, 16, 20 and 24 show professionally prepared photographic material, for which Henkel has bought the world rights for use in this annual report, accompanied by fictitious names and addresses. Any similarity with actual people, particularly in respect of the names used, is merely coinci- dental and unintentional. Published by Calendar

Henkel KGaA Annual General Meeting of Henkel KGaA 2005: 40191 Düsseldorf, Germany Monday, April 18, 2005 Phone: +49 (0)211 797-0 CCD Congress Center, Düsseldorf

English translation by: Jeannette Jennings, Publication of Report Paul Knighton for the Second Quarter 2005: Coordination: Rolf Juesten, Oliver Luckenbach, Wednesday, August 3, 2005 Dirk Neubauer Concept and Design: Kirchhoff Consult AG, Hamburg Publication of Report Photographs: Henkel, Andreas Fechner, Wilfried for the Third Quarter 2005: Wolter, Corbis, Getty Images, Zefa Wednesday, November 2, 2005 Produced by: Schotte, Krefeld Fall Press and Analysts’ Conference 2005: Corporate Communications Wednesday, November 2, 2005 Phone: +49 (0)211 797-3533 Fax: +49 (0)211 798-2484 Press Conference for Fiscal 2005 E-mail: [email protected] and Analysts’ Meeting 2006: Tuesday, February 21, 2006 Investor Relations Phone: +49 (0)211 797-3937 Annual General Meeting of Henkel KGaA 2006: Fax: +49 (0)211 798-2863 Monday, April 10, 2006 E-mail: [email protected] Up-to-date facts and figures on Henkel also available on the internet: www.henkel.com PR No.: 205 20.000 ISSN: 07244738 ISBN: 3-923324-00-6 Responsible Care®

This publication was printed on paper from pulp bleached without chlorine, and bound with Purmelt MicroEmission for the highest standards in occupational health and safety. Glossy cover produced using water-based Liofol laminating adhesives from Henkel. All product names registered trademarks of Henkel KGaA, Düsseldorf, Germany or its affiliated companies.

This document contains forward-looking statements which are based on the current estimates and assumptions made by the corporate management of Henkel KGaA. Forward-looking statements are characterized by the use of words such as expect, intend, plan, predict, assume, believe, estimate, anticipate and similar formulations. Such statements are not to be understood as in any way guaranteeing that those expectations will turn out to be accu- rate. Future performance and the results actually achieved by Henkel KGaA and its affiliated companies depend on a number of risks and uncertainties and may therefore differ materially from the forward-looking statements. Many of these factors are outside Henkel’s control and cannot be accurately estimated in advance, such as the future economic environment and the actions of competitors and others involved in the marketplace. Henkel neither plans nor undertakes to update any forward-looking statements.