Annual Report 2017 Contents Our business units The Company 2 Foreword 6 Report of the Supervisory Board 12 Management Board 14 Henkel 2020+ 30 Shares and bonds 35 Corporate governance Combined management report 58 Management report subindex 59 Fundamental principles of the Group 65 Economic report 92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report 104 Forecast Consolidated financial statements 106 Consolidated financial statements subindex 108 Consolidated statement of financial position 110 Consolidated statement of income 110 Consolidated statement of comprehensive income 111 Consolidated statement of changes in equity 112 Consolidated statement of cash flows 113 Notes to the consolidated financial statements 175 Subsequent events 176 Independent Auditor’s Report 182 Recommendation for the approval of the annual financial statements and the appropriation of the profit of Henkel AG & Co. KGaA 183 Responsibility statement by the Personally Liable Partner 184 Corporate bodies of Henkel AG & Co. KGaA Further information 188 Quarterly breakdown of key financials 189 Multi-year summary 190 Index of tables and graphs 193 Glossary 195 Credits 196 Contacts Financial calendar Adhesive Technologies Our top brands Beauty Care Our top brands Laundry & Home Care Our top brands Sales + 5.0 % organic sales growth Sales + 0.5 % organic sales growth Sales + 2.0 % organic sales growth 4.8 % 6.1 % 6.4 % 0.3 pp 0.3 pp 0.8 % 1.7 % 2.7 % 0.1 pp 0.3 pp Key financials Adhesive Technologies 4 Sales Adhesive Technologies in million euros in million euros Sales Operating profit (EBIT) Adjusted 1 operating profit (EBIT) 8,961 1,561 1,629 9,387 1,657 1,734 2016 2017 +/– Return on sales (EBIT) Adjusted 1 return on sales (EBIT) 17.4 % 18.2 % 17.7 % 18.5 % pp = percentage points 1 Adjusted for one-time charges / gains and restructuring expenses. 2013 8,117 2014 8,127 2015 8,992 2016 8,961 2017 9,387 0 2,000 4,000 6,000 8,000 Key financials Beauty Care 6 Sales Beauty Care in million euros in million euros Sales Operating profit (EBIT) Adjusted 1 operating profit (EBIT) 3,838 3,868 526 647 535 665 2016 2017 +/– Return on sales (EBIT) Adjusted 1 return on sales (EBIT) 13.7 % 16.9 % 13.8 % 17.2 % pp = percentage points 1 Adjusted for one-time charges / gains and restructuring expenses. 2013 3,510 2014 3,547 2015 3,833 2016 3,838 2017 3,868 0 2,000 4,000 6,000 8,000 Key financials Laundry & Home Care 8 Sales Laundry & Home Care in million euros in million euros Sales Operating profit (EBIT) Adjusted 1 operating profit (EBIT) 5,795 803 1,000 6,651 989 1,170 2016 2017 +/– Return on sales (EBIT) Adjusted 1 return on sales (EBIT) 13.9 % 17.3 % 14.9 % 17.6 % pp = percentage points 1 Adjusted for one-time charges / gains and restructuring expenses. 14.8 % 23.2 % 17.0 % 1.0 pp 0.3 pp 2013 4,580 2014 4,626 2015 5,137 2016 5,795 2017 6,651 0 2,000 4,000 6,000 8,000 5 7 9 Highlights 2017 Sales EBIT EPS Dividend + 3.1 % 17.3 % 5.85 euros 1.79 euros organic sales growth adjusted 1 return on sales (EBIT): up 0.4 percentage points adjusted 1 earnings per preferred share (EPS): up 9.1 percent dividend per preferred share 2 Key financials in million euros Sales Operating profit (EBIT) Adjusted 1 operating profit (EBIT) Return on sales (EBIT) in % Adjusted 1 return on sales (EBIT) in % Net income Attributable to non-controlling interests Attributable to shareholders of Henkel AG & Co. KGaA Earnings per preferred share in euros Adjusted 1 earnings per preferred share in euros Return on capital employed (ROCE) in % Dividend per ordinary share in euros Dividend per preferred share in euros 2013 2014 2015 2016 2017 16,355 16,428 18,089 18,714 20,029 2,285 2,516 2,244 2,588 2,645 2,923 2,775 3,172 3,055 3,461 14.0 15.4 13.7 15.8 14.6 16.2 14.8 16.9 15.3 17.3 1,625 36 1,589 1,662 34 1,628 1,968 47 1,921 2,093 40 2,053 2,541 22 2,519 3.67 4.07 20.5 1.20 1.22 3.76 4.38 19.0 1.29 1.31 4.44 4.88 18.2 1.45 1.47 4.74 5.36 17.5 1.60 1.62 5.81 5.85 16.3 1.77 2 1.79 2 1 +/– 2016 – 2017 7.0 % 10.1 % 9.1 % 0.5 pp 0.4 pp 21.4 % – 45.0 % 22.7 % 22.6 % 9.1 % – 1.2 pp 10.6 % 10.5 % pp = percentage points 1 Adjusted for one-time charges / gains and restructuring expenses. 2 Proposal to shareholders for the Annual General Meeting on April 9, 2018. Sales by business unit 2017 2 Sales by region 2017 3 Beauty Care 19 % Corporate 1 % Japan / Australia / New Zealand 3 % North America 26 % Corporate 1 % Laundry & Home Care 33 % Adhesive Technologies 47 % Western Europe 30 % Emerging markets 1 40 % Corporate = sales and services not assignable to the individual business units. 1 Eastern Europe, Africa / Middle East, Latin America, Asia (excluding Japan). What drives us Our purpose Our values Creating sustainable value. Our vision Leading with our innovations, brands and technologies. We put our customers and consumers at the center of what we do. We value, challenge and reward our people. We drive excellent sustainable financial performance. We are committed to leadership in sustainability. We shape our future with a strong entrepreneurial spirit based on our family business tradition. 2 Henkel Annual Report 2017 Hans Van Bylen Chairman of the Management Board “ 2017 was a successful year for Henkel: We delivered a strong business performance, achieved our financial targets for the year and made significant progress with key strategic initiatives and projects.” Henkel Annual Report 2017 3 2017 was a very good year for Henkel. Despite challenging and volatile market conditions, we achieved our financial targets for the year and reached new record levels in sales and earnings. For the first time, we exceeded annual sales of more than 20 billion euros. This is an important milestone for our company. We also delivered record margins and new highs in adjusted 1 earn- ings per share. Our business performance was once again driven by our strong brands, leading technologies and winning innovations as well as a clear focus on costs. We focused on the implementation of our strategic priorities and made substantial progress with many key strategic initiatives and projects. In the course of the year, we also agreed and closed several acquisitions which will complement and further strengthen our portfolio in both our consumer and our industrial businesses. Our excellent performance in sustainability was again confirmed by international rating agencies, and Henkel was recognized as one of the global “industry leaders” in sustainability. The successful development of our company in 2017 has been achieved thanks to more than 53,000 creative, passionate and motivated Henkel employees around the world. It is their com- mitment and entrepreneurial spirit which make the difference in a highly competitive market environment. They are united by shared values and inspired by a strong common purpose: to create sustainable value for all our stakeholders. On behalf of the Management Board and you, our shareholders and friends of the company, I would like to thank our employees for their contributions to our business success in 2017. Strong performance in 2017 In fiscal 2017, we delivered on our financial targets for the year and reported new highs for sales, profitability and earnings. Henkel Group sales grew to 20,029 million euros compared to 18,714 million euros in the previous year. Organic sales growth was at 3.1 percent. Adjusted earnings before interest and taxes (EBIT) rose by 9.1 percent to 3,461 million euros compared to 3,172 million euros. Adjusted return on sales increased to 17.3 percent compared to 16.9 percent. Adjusted earnings per preferred share (EPS) grew to 5.85 euros, an increase of 9.1 percent compared to 5.36 euros in the previous year. All three business units contributed to the overall business performance in 2017. Emerging markets generated total sales of 8,130 million euros and very strong organic growth of 5.3 percent. We also achieved positive organic sales growth in our mature markets. The development of our share price, however, was mixed. After reaching their highest level to date in June, Henkel shares developed weaker than the DAX. Henkel preferred shares closed 2017 slightly below the prior-year level and the ordinary shares slightly above. + 3.1 % organic sales growth. 17.3 % adjusted 1 return on sales. + 9.1 % adjusted 1 earnings per preferred share. At our Annual General Meeting on April 9, 2018, we will propose to our shareholders a dividend payment of 1.79 euros per preferred share. This is a new high and represents an increase of 10.5 percent compared to the 1.62 euros paid out in 2017. 1 Adjusted for one-time charges / gains and restructuring expenses. 4 Henkel Annual Report 2017 Shaping our future Through to 2020 and beyond, we will be pursuing clear ambitions for Henkel. We want to generate more profitable growth and to become more customer-focused, innovative, agile and digital. In addition, we aim to promote sustainability in all business activities along the entire value chain and re inforce our leading position in this field. To achieve these ambitions, we have defined four strategic priorities: drive growth, accelerate digitalization, increase agility and fund growth. In 2017, we successfully implemented a number of strategic initiatives and projects to drive growth in both mature and emerging markets. Specific programs in our industrial and consumer businesses helped us to deepen our engagement with customers. This led to more frequent exchanges, deeper understanding, more joint projects and an increasing share of sales with our top 10 customers in each of our three business units. We further strengthened our leading brands and technologies through targeted investments. We increased the speed and quality of innovations across all business units through specific initiatives. These resulted in shorter innovation cycles and higher first-year sales from innovations. To capture new sources of growth, we set up a dedicated Corporate Venture Capital unit, com- bining all venture activities at Henkel. This unit explores new technologies, applications and business models of strategic interest for our company. We successfully progressed the integration of The Sun Products Corporation acquired in 2016. The integration process is well underway and the newly combined North American Laundry & Home Care business recorded a very good performance in 2017. We also agreed and closed several acquisitions with a total value of around 2 billion euros in our industrial and consumer businesses. They will complement our portfolio and strengthen our competitiveness. Accelerating digitalization is key to successfully growing our business, strengthening the relationships with our customers and consumers, optimizing our processes and transforming the entire company. In 2017, we further digitized our interactions with customers, consumers, business partners and suppliers along the entire value chain. Digitally driven sales increased double- digit across all our business units. We also focused on leveraging the full potential of Industry 4.0 for Henkel and progressed the digitalization of our integrated Global Supply Chain. We expanded specific training and development programs for employees to strengthen the digital capabilities of our company. In addition, we established the position of a Chief Digital Officer with a dedicated organization to lead and facilitate the digital transformation across all business units. In order to create a more agile organization, we have fostered the entrepreneurial spirit of our employees, promoted openness to change and aimed to expand employees’ decision-making power. As part of our fastest time-to-market initiatives, we reduced innovation lead times and acceler- ated entries into new markets. We also introduced more flexible business models to better adapt to dynamic markets, and further optimized workflows and processes. Henkel Annual Report 2017 5 As part of our strategic priority to fund growth, we began to implement our ONE!ViEW initiative, which aims to optimize cost management through increased global cost transparency and improved budget allocation. We continued to drive forward expansion of our Global Supply Chain. In addition, we introduced net revenue management across all business units and further increased efficiency in our structure, for example through new approaches in our shared service centers focusing on automation and robotics. Henkel has a long-standing commitment to sustainability. Based on a clear strategy with defined targets up to 2020 and 2030, we drive sustainable practice within our own operations as well as along the entire value chain – from our suppliers to our customers and consumers. Our progress and performance were once again recognized in numerous rankings and ratings in 2017. For example, Henkel was named “industry leader” in the global Dow Jones Sustainability Index. This was only possible thanks to our highly committed employees. In 2017, we enabled our employees globally through dedicated engagement and training programs to become Sustain- ability Ambassadors. Thank you for your trust and confidence In summary, 2017 was a successful year for Henkel: We delivered a strong business performance, achieved our financial targets for the year and made significant progress with key strategic initiatives and projects. We are building on a strong foundation and will continue our successful development in the future. On behalf of the Management Board, I would like to thank our supervisory bodies for their valuable advice and I would also like to thank you, our shareholders, for your continued trust and support. In addition, we would like to thank our customers and consumers around the world for their confidence in our company, our strong brands and our leading technologies. We are fully committed to creating sustainable value and to continuing the successful, long-term development of our company. Düsseldorf, January 30, 2018 Sincerely, Hans Van Bylen Chairman of the Management Board 6 Report of the Supervisory Board Henkel Annual Report 2017 Dr. Simone Bagel-Trah Chairwoman of the Shareholders’ Committee and the Supervisory Board “ We believe that Henkel is well equipped for the future and are confident that we will be able to move the company further forward.” Henkel Annual Report 2017 Report of the Supervisory Board 7 The economic and political environment in which Henkel operates again proved to be challenging in 2017, with widespread economic and political uncertainty prevailing. Global economic growth was moderate overall. The underlying conditions on the consumer goods markets were difficult. Adverse currency effects strengthened as the year progressed. In spite of these challenges, we are very satisfied with developments in fiscal 2017. Henkel’s business performance was again strong, with both sales and profits reaching new all-time highs. All of our business units contrib- uted to this success. The implementation of our strategic priorities also progressed well in the fiscal year just ended. On behalf of the Supervisory Board, I would like to thank all of our employees at Henkel for their dedicated commitment and help over the past year. My thanks are equally due to the members of the Management Board who have steered the corporation successfully through a difficult market environment. I am also grateful to our employees’ representatives and works councils for their consistently constructive support in growing Henkel. To you, our shareholders, I extend my special thanks for your continued confidence in our company, its management and employees, and our brands and technologies over this past fiscal year. Ongoing dialog with the Management Board The Supervisory Board continued to discharge its duties diligently in fiscal 2017 in accordance with the legal statutes, Articles of Association and rules of procedure governing its actions. In particular, we consistently monitored the work of the Management Board, advising and supporting it in its stewardship, in the strategic development of the corporation, and in decisions relating to matters of major importance. The Management Board and Supervisory Board con- tinued to cooperate in 2017 through extensive dialog founded on mutual trust and confidence. The Man- agement Board kept us regularly and extensively informed of all major issues affecting the corporation’s business and our Group companies with prompt written and oral reports. Specifically, the Management Board reported on the business situation, operational development, business policy, profitability issues, our short-term and long-term corporate, financial and personnel plans, as well as capital expenditures and organizational measures. Reports for the year and the half year focused on the sales and profits of Henkel Group as a whole, with further analysis by business unit and region. All members of the Super- visory Board consistently had sufficient opportunity to critically review and address the issues raised by each of these reports and to provide their individual guidance in both the Audit Committee and in ple- nary Supervisory Board meetings. Outside of Supervisory Board meetings, the Chairman of the Audit Committee and I, as Chairwoman of the Supervisory Board, remained in regular contact with individual members of the Management Board or with the Management Board as a whole. This procedure ensured that we were constantly aware of current business developments and significant events. The other members were informed of major issues no later than by the next Supervisory Board or committee meeting. The Supervisory Board and the Audit Committee each held four regular meetings in the reporting year. Attendance at the Supervisory Board and committee meetings was around 97 percent and around 92 per- cent respectively. There were no indications of conflicts of interest involving Management Board or Supervisory Board members that required immediate disclosure to the Supervisory Board and reporting to the Annual General Meeting. Major issues discussed at Supervisory Board meetings In each of our meetings, we discussed the reports submitted by the Management Board, conferring with it on the development of the corporation and on stra- tegic issues. We also discussed the overall economic situation and Henkel’s business performance. 8 Report of the Supervisory Board Henkel Annual Report 2017 In our meeting on February 21, 2017, we discussed the annual and consolidated financial statements for 2016, including the combined management report for Henkel AG & Co. KGaA and the Group, together with the risk report and corporate governance report. We also approved both the 2017 Declaration of Compliance and our proposals for resolution by the 2017 Annual General Meeting. A detailed report of this was included in our last Annual Report. At the same meeting, we discussed how the implementation of our globally centralized and integrated supply chain, including purchasing, was progressing, as well as learning more about the workflows at ONE!Global Supply Chain headquarters. As well as discussing market and competitive condi- tions and the performance of our business units over the first few months of the fiscal year, our meeting on April 6, 2017, focused on our Human Resources (HR) initiatives and ambitions, together with our HR management plans for the coming years. Henkel is striving to foster an inspirational and motivational corporate culture with agile and innovative teams and to expand the digitalization of our organizational structure, which will include new digital training formats and smart HR system applications. We also talked in depth about the innovation strategies of our business units, including discussion of the associated product launches and research projects. In addition to discussing the performance of our business units over the first eight months of the year, another key item on the agenda for our meeting on September 15, 2017, was the non-financial reporting regime required under the European Union’s new (EU) Corporate Social Responsibility (CSR) Directive, and the procedure for auditing the same. We also examined in more detail our progress in the field of sustainability, and discussed in depth the status of implementation of our Henkel 2020+ strategy in the individual business units. Our meeting on December 15, 2017, focused on the expected results for 2017 and our assets and financial planning for fiscal 2018. We also discussed in detail the associated budgets of our business units based on comprehensive documentation. Supervisory Board committees In order to enable us to efficiently comply with the duties incumbent upon us according to legal statute and our Articles of Association, we have established an Audit Committee and a Nominations Committee. The Audit Committee was chaired in the year under review by Prof. Dr. Theo Siegert, who complies with the statutory requirements of impartiality and expertise in the fields of accounting or auditing and brings experience in the application of accounting principles and internal control procedures. For more details on the responsibilities and composition of these com- mittees, please refer to the corporate governance report (on pages 35 to 46) and the membership lists on page 185 of this Annual Report. Committee activities Following the appointment of the external auditor by the 2017 Annual General Meeting, it was mandated by the Audit Committee to audit the annual financial statements and the consolidated financial statements, including the combined management report for Henkel AG & Co. KGaA and the Group, and to review the interim financial reports for 2017. The audit fee and focus areas of the audit were also established. The Audit Committee again obtained the necessary validation of auditor independence for the perfor- mance of these tasks. The auditor has informed the Audit Committee that there are no circumstances that might give rise to a conflict of interest in the execution of its duties. Agreement was also reached that the auditor will notify the Supervisory Board immediately of any findings or incidents discovered or occurring during the audit that are material to the performance of the Supervisory Board’s duties. The Audit Committee also engaged the external auditor to review the contents of the separate, combined non-financial statement for Henkel AG & Co. KGaA and the Group, which was compiled as a separate non-financial report on the basis of the former sus- tainability report and made available in the public domain through publication on our website. The Audit Committee met four times in the year under review. The Chairman of the Audit Committee also remained in regular contact with the auditor outside of the meetings. The meetings and resolutions were prepared through the provision of reports and other information by the Management Board. The Chair of the Committee reported promptly and in full to the plenary Supervisory Board on the content and results of each of the Committee meetings. Henkel Annual Report 2017 Report of the Supervisory Board 9 The company and Group accounts, including the interim financial reports (quarterly statements and financial report for the half year) were discussed at all Audit Committee meetings, with all matters arising being duly examined with the Management Board. The three meetings at which we discussed and approved the interim financial reports were attended by the auditor. The latter reported on the results of the reviews and on the main issues and occurrences relevant to the work of the Audit Committee. There were no objections raised in response to these reports. The Audit Committee also focused in greater detail on the accounting process and the efficacy and further development of the Group-wide internal control and risk management systems. The efficiency of the risk management system was reviewed, based on the risk reports of previous years. In addition, the Audit Committee received the report of the General Counsel & Chief Compliance Officer regarding major litigations and compliance issues within the Group, as well as the status report of the Head of Internal Audit, and approved the audit plan prepared and submitted by Internal Audit. This extends to examining the functional efficiency and efficacy of the internal control system and our compliance orga- nization. The Audit Committee likewise discussed treasury risks and their management. A further key item for discussion was the mandatory rotation of auditors, which requires a new bidding procedure for the contract to audit the financial statements from fiscal 2020 onward. An initial assessment of potential candidates was performed on the basis of the Audit Committee’s definition and weighting of evaluation criteria. The selection process consists of multiple stages that will culminate in the definitive proposal of two candidates to the Supervisory Board at the end of 2019. At its meeting on February 20, 2018, attended by the auditor, the Audit Committee discussed the annual and consolidated financial statements, together with the combined management report for Henkel AG & Co. KGaA and the Group, the separate, combined non-financial report for Henkel AG & Co. KGaA and the Group for fiscal 2017, as well as the audit reports and auditor’s notes, the associated proposal for appropriation of profit, and the risk report, and prepared the corresponding resolutions for the Super- visory Board. It also recommended that the Super- visory Board should propose to the Annual General Meeting the election of KPMG as auditor for fiscal year 2018. A declaration from the auditor asserting its independence was again duly received, accompanied by details pertaining to non-audit services rendered in fiscal 2017 and those envisioned for fiscal 2018. There was no evidence of any bias or partiality on the part of the auditor. As in previous years, other members of the Super- visory Board took part as guests in this specifically accounting-related meeting of the Audit Committee. The Nominations Committee submitted a recommen- dation regarding the planned election of an additional shareholder representative in preparation for the Supervisory Board’s proposal for resolution by the 2018 Annual General Meeting. Efficiency audit The Supervisory Board and Audit Committee regularly review the efficiency with which they perform their duties, based on a comprehensive, company-specific checklist. The checklist covers important aspects such as meeting preparation and procedure, the scope and content of documents and information – particularly with respect to financial reports, compli- ance and audits – as well as financial control and risk management. Such a survey took place in the report- ing year. The results and assessments were examined in detail in the meeting of the Audit Committee on February 20, 2018, and the meeting of the Supervisory Board on February 21, 2018, where issues of corporate governance and opportunities for improvement were also discussed. The efficiency with which the Super- visory Board and Audit Committee carry out their duties and the required independence of their mem- bership were duly confirmed. Corporate governance and declaration of compliance The Supervisory Board again dealt with questions of corporate governance in the reporting year. Our meeting on September 15, 2017, focused in particular on reviewing and updating our objectives with regard to Supervisory Board composition to reflect both the diversity requirements specified in the CSR Directive Implementation Act and the amendments to the German Corporate Governance Code [DCGK]. Details of this and of Henkel’s corporate governance can be found in the management report on corporate governance (pages 35 to 46 of this Annual Report), with which we fully acquiesce. 10 Report of the Supervisory Board Henkel Annual Report 2017 At our meeting on February 21, 2018, we discussed and approved the joint declaration of compliance for 2018 to be submitted by the Management Board, Shareholders’ Committee and Supervisory Board, as specified in the German Corporate Governance Code. The full wording of the current and previous declara- tions of compliance can be found on the company website. Annual and consolidated financial statements / Audit In its capacity as auditor appointed for 2017 by the Annual General Meeting, KPMG examined the annual financial statements prepared by the Management Board, and the consolidated financial statements, together with the consolidated management report, which has been combined with the management report for Henkel AG & Co. KGaA for fiscal 2017. The annual financial statements and the combined man- agement report were prepared in accordance with German statutory provisions. The consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRSs) as endorsed by the EU, and in accordance with the supplementary German statutory provisions pursuant to Section 315 a (1) German Commercial Code [HGB]. The consolidated financial statements in their present form exempt us from the requirement to prepare consolidated financial statements in accordance with German law. KPMG conducted its audits in accordance with Section 317 HGB and German generally accepted standards for the audit of financial statements promul- gated by the Institute of Public Auditors in Germany [Institut der Wirtschaftsprüfer, IDW]. Unqualified audit opinions were issued for the annual and the consolidated financial statements, as well as for the combined management report. KPMG also reviewed the separate, combined non- financial statement for Henkel AG & Co. KGaA and the Group for fiscal 2017 as compiled by the Manage- ment Board to ensure its contents included the disclosures required by law. The review was based on the International Standard on Assurance Engage- ments (ISAE) 3000 (Revised): “Assurance Engagements other than Audits or Reviews of Historical Financial Information” as published by the International Auditing and Assurance Standards Board (IAASB) for the purpose of obtaining limited assurance. Based on its audit review and the audit evidence obtained, the auditor is not aware of any circumstances that might prompt it to believe that the disclosures in the sepa- rate, combined non-financial report for Henkel AG & Co. KGaA and the Group for fiscal 2017 have not been prepared in compliance with all material aspects of commercial law provisions. The annual financial statements, consolidated finan- cial statements, combined management report, and separate, combined non-financial report for fiscal 2017 were presented in good time to all members of the Supervisory Board, together with the corresponding audit reports and relevant auditor’s notes and the recommendations by the Management Board for the appropriation of the profit made by Henkel AG & Co. KGaA. We examined these documents and discussed them at our meeting on February 21, 2018, in the presence of the auditor, which reported on its main audit findings. We received and approved the audit reports. The Chairman of the Audit Committee pro- vided the plenary session of the Supervisory Board with a detailed account of the treatment of the annual financial statements, the consolidated financial statements, the combined management report and the separate, combined non-financial report by the Audit Committee. Having received the final results of the review conducted by the Audit Committee and concluded our own examination, we see no reason for objection to the aforementioned documents. We have agreed to the results of KPMG’s audits. The assessment by the Management Board of the position of the company and the Group coincides with our own appraisal. At our meeting on February 21, 2018, we concurred with the recommendations of the Audit Committee and therefore approved the annual financial statements, the consolidated financial Henkel Annual Report 2017 Report of the Supervisory Board 11 statements, the combined management report and the separate, combined non-financial report as prepared by the Management Board. Additionally, we discussed and approved the proposal by the Management Board to pay out of the unappro- priated profit of Henkel AG & Co. KGaA a dividend of 1.77 euros per ordinary share and of 1.79 euros per preferred share, and to carry the remainder and the amount attributable to the treasury shares held by the company at the time of the Annual General Meet- ing forward to the following year. This proposal takes into account the financial and earnings position of the corporation, its medium-term financial and invest- ment planning, and the interests of our shareholders. In our meeting on February 21, 2018, we also ratified our proposal for resolution by the Annual General Meeting relating to the appointment of the external auditor for the next fiscal year, based on the recom- mendations of the Audit Committee. Neither the recommendation by the Audit Committee nor the Supervisory Board’s proposal to elect KPMG as auditor for 2018 were unduly influenced by any third party; nor were agreements reached that might have restricted the choice of possible auditors. Risk management Risk management issues were examined not only by the Audit Committee but also by the plenary Super- visory Board, with emphasis on the risk management system in place at Henkel and any major individual risks of which we needed to be notified. There were no identifiable risks that might jeopardize the con- tinued existence of the corporation as a going concern. The structure and function of the risk early warning system were also integral to the audit performed by KPMG, which found no cause for reservation. It is also our considered opinion that the risk management system corresponds to the statutory requirements and is fit for the purpose of early identification of developments that could endanger the continuation of the corporation as a going concern. Changes in the Supervisory Board and Management Board As already reported last year, employee representative Mayc Nienhaus left the Supervisory Board and was replaced by Angelika Keller, effective January 1, 2017. Pascal Houdayer, responsible for the Beauty Care business unit since March 1, 2016, left the Management Board by mutual agreement. Effective November 1, 2017, Jens-Martin Schwärzler was appointed to the Management Board as the member responsible for the Beauty Care business unit. We thanked the departing members of the Supervisory Board and Management Board for their dedication to the interests of the company. We were delighted to be able to fill the vacancy on the Management Board internally with an experienced executive: Jens-Martin Schwärzler has been working for Henkel since 1992. Prior to his appointment to the Management Board, he was responsible for Henkel’s consumer goods business in North America. Under his leadership, Henkel successfully launched leading brands such as Persil and Schwarzkopf in the North American market and integrated The Sun Products Corporation acquired by Henkel in 2016. We wish Jens-Martin Schwärzler every success in his new role. Fiscal 2017 was a very successful year for Henkel. The coming year will continue to pose further challenges for both our employees and the company’s manage- ment. Many of the issues and changes we focused on in 2017 will continue to occupy us in the coming fiscal year. We believe that Henkel is well equipped for the future and are confident that we will be able to move the company further forward. We thank you for your ongoing trust and support. Düsseldorf, February 21, 2018 On behalf of the Supervisory Board D r. Simone Ba gel-Tra h (C h air w om an) 12 Management Board Henkel Annual Report 2017 Jan-Dirk Auris Jens-Martin Schwärzler Bruno Piacenza Executive Vice President Adhesive Technologies Executive Vice President Beauty Care Executive Vice President Laundry & Home Care Born in Cologne, Germany, on February 1, 1968; with Henkel since 1984. Born in Ravensburg, Germany, on August 23, 1963; with Henkel since 1992. Born in Paris, France, on December 22, 1965; with Henkel since 1990. Henkel Annual Report 2017 Management Board 13 Hans Van Bylen Chairman of the Management Board Born in Berchem, Belgium, on April 26, 1961; with Henkel since 1984. Kathrin Menges Carsten Knobel Executive Vice President Human Resources / Infrastructure Services Born in Pritzwalk, Germany, on October 16, 1964; with Henkel since 1999. Executive Vice President Finance (CFO) / Purchasing / Integrated Business Solutions Born in Marburg / Lahn, Germany, on January 11, 1969; with Henkel since 1995. 14 Henkel 2020+ Henkel Annual Report 2017 Focusing on our strategic priorities We are shaping our future with a strong entrepreneurial spirit based on an inspiring purpose and a common vision for the future, which unite everyone at Henkel. Our actions are guided by clear values. For more than 140 years now, Henkel has been driven by a strong entrepreneurial spirit that is part of our company’s DNA. Always starting up – with new ideas, new businesses, new markets and new ways. And we want to make a difference with what we do. We want to create sustainable value – for our customers and consumers, our people, our share- holders and for the wider society and the commu- nities in which we operate. This is our purpose. In a highly volatile and increasingly complex busi- ness environment, we pursue a long-term strategy to sustain our profitable growth. We have defined four strategic priorities to guide our actions through to 2020 and beyond: drive growth, accelerate digitalization, increase agility and fund growth. In 2017, we successfully implemented and pro- gressed a number of key strategic initiatives and programs. To ensure that all employees understand our strategic direction and how they can actively contribute to the successful implementation of our initiatives, we have introduced a wide range of engaging inter- nal communication formats. A global strategy survey among more than 10,000 management employees confirmed the high level of understanding and commitment to our strategic priorities. Henkel Annual Report 2017 Henkel 2020+ 15 Fund Growth Increase Agility Drive Growth Accelerate Digitalization Drive growth Driving growth in mature and emerging markets is a key strategic priority for Henkel. In order to achieve this, we focus on targeted initiatives to create superior customer and consumer engagement, strengthen our leading brands and technologies, develop exciting innovations and services, and capture new sources of growth. Accelerate digitalization Accelerating digitalization helps us to successfully grow our business, strengthen the relationships with our customers and consumers, optimize our processes and transform the entire company. By 2020, we will implement a range of initiatives to drive our digital business, leverage Industry 4.0 and eTransform the organization. Increase agility In a highly volatile and dynamic business environment, increasing the agility of the organization is a critical success factor for Henkel. This requires energized and empowered teams, fastest time-to-market initiatives as well as smart and simplified processes. Fund growth In order to fund growth, we implement new approaches to optimize resource allocation, focus on net revenue management, further increase efficiency in our structures, and continue to expand our Global Supply Chain organization. Together, these initiatives will contribute to further improving profitability and enable us to fund our growth ambitions for 2020 and beyond. 16 Adhesive Technologies Henkel Annual Report 2017 Lightweight construction Our material solutions help to compensate the added weight of batteries and electronics. This will not only increase the driving range of cars, but also improve their sustainability. Self-driving Cameras, sensors and radar technology transfer data and information to high-performance assistance systems in real time. We offer up to 10 different applications for one camera. Intelligence As many as 100 miniature computers will process the data, making driving safer and more comfortable. Our innovative applications protect automotive electronics, enabling better performance and a longer service life. The automotive industry is undergoing a fundamental transformation: eMobility, new technologies to enable smart mobility and autonomous driving are just some examples. Thanks to our leading portfolio of technologies, our capabilities to innovate and develop individual solutions, our global presence and our strong partnerships with manufacturers along the entire value chain in the automotive industry, Henkel is well positioned to actively contribute to the transformation of this industry. Henkel Annual Report 2017 Adhesive Technologies 17 Driving innovation Displays Our innovations contribute significantly to achieving the best image quality and longest service life possible for displays, as well as enabling new designs and additional functions. Battery technology Our leading solutions, which include thermal compounds, structural adhesives and functional coatings, make batteries more effective and also more cost-efficient. Henkel’s Adhesive Technologies business unit has a unique and leading portfolio of technologies to make cars safer, more sustainable and smarter. The use of new materials makes cars lighter and ensures safety and comfort at the same time. These lightweight materials can often only be bonded together by innovative adhesives, replacing the need for traditional welding. to the internet. Our adhesives products play an important role in the digitalization of the car of tomorrow: They insulate sensors and cameras, manage the temperature of processors and protect the wiring in the car. Our solutions can also be found in the increasing number of displays which support the driver with real-time information or entertain passengers. Cars will also become more intelligent thanks to the use of digital devices and permanent connection www.henkel.com/futurecar 18 Beauty Care Henkel Annual Report 2017 Connecting with our customers Henkel Beauty Care is one of the leading beauty businesses worldwide, serving both the retail and the professional markets. In our Hair Salon business, we partner with our customers, professional hairdressers around the world. With our innovations and know ledge, we help them to create new styles. We also jointly develop and market new coloring and styling products. In 2017, we successfully launched #mydentity haircolor together with Guy Tang, a leading hairdresser and social media influencer. Henkel Annual Report 2017 Beauty Care 19 Guy Tang is a hairdresser from Los Angeles who has a combined online following of more than 4 million, most of them hairdressers and hair stylists. With his work and social media activities, he inspires his online community and provides education on how to create unique new hair colors and styles. #mydentity allows hairdressers to develop custom- ized colors and exclusive hair styles for their clients. The products are marketed entirely via digital channels and have been very successful in the USA, the world̓’s leading hair professional market. Over recent years, Henkel has successfully strengthened its position in this market, through both organic growth and targeted acquisitions, and has become one of the top three hair professional businesses in the USA. www.mydentitycolor.com 20 Laundry & Home Care Henkel Annual Report 2017 Persil is an iconic brand – not only in Germany where it was born in 1907, but also in more than 50 countries globally, including Europe, North America, the Middle East and Asian markets. Excellent performance and constant innovation have always been the drivers of Persil’s success. In German we say: “Persil stays Persil, because it never stays Persil.” This sentence sum- marizes our promise to constantly deliver premium cleanliness, convenience and innovation to consumers worldwide. In 2017, we were proud to celebrate the 110th anniversary of Persil. Henkel Annual Report 2017 Laundry & Home Care 21 Leveraging iconic brands Persil is one of the top brands for Henkel and the biggest brand for our Laundry & Home Care business, generating sales of more than 1 billion euros in 2017. The successful evolution of this brand is driven by a continued commitment to quality, sustainability and innovation. Over the decades, the brand has consistently set the standard with milestones in detergentrelated research and development. In 2017, we successfully launched Persil Clean & Smooth, which helps consumers make ironing easier while protecting garments from creasing. In 2017, we celebrated Persil’s birthday with a success ful social media campaign – influencers from around the world posted pictures and comments on Instagram using the hashtag #persil110years. www.instagram.com/persil_de 22 Finance Henkel Annual Report 2017 Advancing digital in Finance In our global Finance organization, we enable the successful steering of our businesses through transparent financial information and analysis, real-time reports, agile end-to-end processes and advanced data analytics. This provides us with deeper insights and enables us to better understand our markets, to assess risks and to identify opportunities – helping us in turn to further optimize the efficiency of our internal processes. Henkel Annual Report 2017 Finance 23 Digitalization has become the backbone of our financial management and our processes. It is a key driver of our Finance organization – from Corporate Finance to our shared service centers as well as our integrated Global Supply Chain, which combines global purchasing, production and logistics. conclusions makes the difference in today’s com- petitive environment. In our Integrated Business Solutions organization, we have a dedicated team for data analytics providing our businesses with valuable insights to enable better and faster decisions based on real-time data. The amount and complexity of business and market data are constantly growing. That is why excellent data management has become a driver of competitive advantage. The ability to ask the right questions, to know how to analyze data and draw the right In addition, we are leveraging the potential of software automation and robotics in our shared service centers to further optimize our process efficiency. 24 People Henkel Annual Report 2017 Virtual learning Constant learning, developing new capabilities and sharing knowledge have become essential factors for our company’s success. That is why we offer our employees a broad range of learning programs and opportunities to acquire new capabilities. Digital learning platforms play an increasingly important role in our efforts to constantly train and upskill our global organization. Henkel Annual Report 2017 People 25 Digital learning platforms give our employees fast and flexible access to a wide range of training content. The Henkel Global Academy is our central learning platform, open to everyone at Henkel to learn about business and technologies, improve management and leadership skills or refine specific capabilities. A variety of different programs, eLearning modules and instructional videos by renowned experts are available on the Academy website. We encourage our workforce to integrate know- ledge-building exercises into their everyday work routines. In 2017, we further extended our offering through a collaboration with Lynda.com, adding more than 9,500 courses in English, German and Spanish and around 150,000 videos. These learning modules are updated regularly and can also be used on mobile devices. www.henkel.com/careers 26 Digitalization Henkel Annual Report 2017 Digitalization changes the way we do business and interact with our customers and consumers, as well as how we run our company day by day. We are committed to accelerate digitalization along the entire value chain – this is one of our strategic priorities. We are doing this by driving our digital businesses, by leveraging Industry 4.0 and by promoting the digital trans- formation of our organization. In 2017, we made substantial progress in all dimensions. Henkel Annual Report 2017 Digitalization 27 Accelerating digitalization By 2020, we aim to double our digital sales com- pared to 2016, to more than 4 billion euros. In our consumer businesses, we partner with retailers to support their transition to omni-channel offerings. In our industrial business, we run our own state-of- the-art eCommerce platform for industrial custom- ers, offering an integrated user experience. We also see significant potential in leveraging Industry 4.0 in our operations. By fully digitizing our value chain – from planning and purchasing via production to logistics – we aim to increase efficiency, improve service quality and contribute to sustainability. Already today, more than 500 mil- lion data points are registered and processed daily in our global supply chain. A key success factor will be the digital transformation of our organization. We are supporting this transi- tion through agile and flexible working, a test and learn mentality as well as specific training offerings. www.henkel.com/spotlight/industry-4-0 28 Sustainability Henkel Annual Report 2017 Celebrating our ambassadors When it comes to implementing our sustainability strategy, it is our people around the world who make the difference – through their dedication, skills and knowledge. Day by day they contribute to sustainable development at Henkel: They engage with multiple stakeholders and create more value for our customers, consumers and society. They are our Sustainability Ambassadors. Henkel Annual Report 2017 Sustainability 29 Henkel has a long-standing commitment to sustain- ability and is widely recognized for its performance in this field. To engage our employees and drive our sustainability strategy, we launched our global Sustainability Ambassador program in 2012. Since then, more than 50,000 employees have successfully completed the program via eLearning or through team training sessions. knowledge, they can make a visible contribution to sustainability at our sites, by engaging with our business partners and consumers, and in the communities in which we operate. For example, Henkel’s Sustainability Ambassadors are encouraged to volunteer in various social projects or to visit schools to teach children about sustainable behavior. We want to motivate our employees to become involved and lead by example. With their skills and www.henkel.com/sustainability 30 Shares and bonds Henkel Annual Report 2017 Shares and bonds Henkel share price performance varied in 2017. Over the course of the first six months, Henkel shares largely tracked the positive trend of the market as a whole. Within this environment, Henkel preferred shares reached an all-time high on June 19, 2017, of 128.90 euros. On the same day, the ordinary shares also recorded their highest price ever, 113.70 euros. From August onward, Henkel share performance lagged behind its benchmarks. Henkel preferred shares closed the year at 110.35 euros, down 2.6 per- cent, while the ordinary shares posted a slight gain, closing at 100.00 euros or 1.0 percent higher. The preferred shares traded at an average premium of 13.5 percent over the ordinary shares in 2017. Over the course of the year, the DAX rose by 12.5 per- cent to 12,918 points. The EURO STOXX® Consumer Goods Index closed at 712 points, also up 12.5 per- cent. Henkel shares therefore underperformed both the DAX and the European consumer goods index. Year on year, the trading volume (Xetra) of preferred shares showed a slightly declining trend. Each trad- ing day saw an average of around 465,000 preferred shares changing hands (2016: around 473,000). The average volume for our ordinary shares also decreased to around 85,000 shares per trading day (2016: 89,000). The market capitalization of our ordinary and preferred shares was virtually unchanged as of year-end at 45.6 billion euros. Henkel shares have proven to be an attractive invest- ment for long-term investors. Shareholders who invested the equivalent of 1,000 euros when Henkel preferred shares were issued in 1985, and re- invested the dividends received (before tax deduction) in the stock, had a portfolio value of 36,539 euros at the end of 2017. This represents an increase in value of 3,554 percent or an average yield of 11.8 percent per year. Over the same period, the DAX provided an annual return of 7.8 percent. Over the last five and ten years, the Henkel preferred share has shown an average yield of 12.1 percent and 11.1 percent per year respectively, offering a significantly higher return than the average DAX returns of 11.1 percent and 4.8 percent per year for the same periods. Key data on Henkel shares 2013 to 2017 10 in euros Earnings per share Ordinary share Preferred share Share price at year-end 1 Ordinary share Preferred share High for the year 1 Ordinary share Preferred share Low for the year 1 Ordinary share Preferred share Dividend Ordinary share Preferred share Market capitalization 1 in bn euros Ordinary shares in bn euros Preferred shares in bn euros 2013 2014 2015 2016 2017 3.65 3.67 75.64 84.31 75.81 84.48 50.28 59.82 1.20 1.22 34.7 19.7 15.0 3.74 3.76 80.44 89.42 80.44 90.45 67.00 72.64 1.29 1.31 36.8 20.9 15.9 4.42 4.44 88.62 103.20 99.26 115.20 76.32 87.75 1.45 1.47 41.4 23.0 18.4 4.72 4.74 98.98 113.25 105.45 122.90 77.00 88.95 1.60 1.62 45.9 25.7 20.2 5.79 5.81 100.00 110.35 113.70 128.90 96.15 110.10 1.77 2 1.79 2 45.6 26.0 19.6 1 Closing share prices, Xetra trading system. 2 Proposal to shareholders for the Annual General Meeting on April 9, 2018. Henkel Annual Report 2017 Shares and bonds 31 11 Dec. 29, 2017: 110.35 euros e c n a n r e v o g e t a r o p r o C / s d n o b d n a s e r a h S Performance of Henkel shares versus market January through December 2017 Dec. 30, 2016: 113.25 euros in euros 135 130 125 120 115 110 105 January February March April May June July August September October November December Henkel preferred share Henkel ordinary share (indexed) EURO STOXX® Consumer Goods Index (indexed) DAX (indexed) Performance of Henkel shares versus market 2008 through 2017 Dec. 31, 2007: 38.43 euros in euros 140 120 100 80 60 40 20 0 12 Dec. 29, 2017: 110.35 euros 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Henkel preferred share Henkel ordinary share (indexed) EURO STOXX® Consumer Goods Index (indexed) DAX (indexed) 32 Shares and bonds Henkel Annual Report 2017 Henkel represented in all major indices themes) was reflected in regular positive assessments by various national and international rating agencies, from which sustainability indices are derived. Henkel shares are traded on the Frankfurt Stock Exchange, predominantly on the Xetra electronic trading platform. Henkel is also listed on all regional stock exchanges in Germany. In the USA, investors are able to invest in Henkel preferred and ordinary shares by way of stock ownership certificates obtained through the Sponsored Level I ADR (American Depositary Receipt) program. The number of ADRs outstanding for ordinary and preferred shares at the end of the year was approximately 1.8 million (2016: 1.5 million). Henkel has been represented in the ethics index FTSE4Good since 2001, and in the STOXX® Global ESG Leaders index family since its launch by Deutsche Börse in 2011. Our membership in the Ethibel Pioneer Investment Register and the sustainability indices Euronext Vigeo World 120, Europe 120 and Eurozone 120 was also confirmed, as was our membership in the MSCI Global Sustainability Index series. Henkel is also included in the Dow Jones Sustainability Indices World and Europe, and in the Global Challenges Index as one of only 50 companies worldwide. The international importance of Henkel preferred shares derives not least from their inclusion in many leading indices that serve as important indicators for capital markets and as benchmarks for fund managers. Particularly noteworthy in this respect are the MSCI World, STOXX® Europe 600, and FTSE World Europe indices. Henkel’s inclusion in the Dow Jones Titans 30 Personal & Household Goods Index makes it one of the most important corporations in the personal and household goods sector worldwide. As a DAX stock, Henkel is one of the 30 most significant exchange- listed companies in Germany. 13 Preferred shares Ordinary shares 604843 604840 DE0006048432 DE0006048408 HEN3.ETR HEN.ETR 178,162,875 259,795,875 International shareholder structure Compared to the ordinary shares, our preferred shares are the significantly more liquid class of Henkel stock. Apart from the treasury shares, they are entirely in free float. A large majority are owned by institutional investors whose portfolios are usually broadly distrib- uted internationally. According to notices received by the company, mem- bers of the Henkel family share-pooling agreement owned a majority of the ordinary shares amounting to 61.02 percent as of December 17, 2015. We have received no other notices indicating that a share- holder holds more than 3 percent of the voting rights (notifiable ownership). As of December 31, 2017, treasury stock amounted to 3.7 million shares. 14 Preferred shares Ordinary shares Shareholder structure: Institutional investors holding Henkel shares 15 42550U208 42550U109 US42550U2087 US42550U1097 France HENOY HENKY Germany 7 % 9 % 61.02 % of voting rights are held by members of the Henkel fam- ily share-pooling agreement. Share data Security code no. ISIN code Stock exch. symbol Number of shares ADR data CUSIP ISIN code ADR symbol USA 29 % UK 23 % At year-end 2017, the market capitalization of the preferred shares included in the DAX index was 19.6 billion euros. Henkel thus ranked 19th (2016: 18th), or 23rd (2016: 22nd) in terms of trading volume. Our DAX weighting decreased to 1.85 percent (2016: 2.10 percent). Rest of world 13 % Rest of Europe 19 % At November 30, 2017 Source: Nasdaq. Once again our advances and achievements in sustain- able management earned recognition from external experts in 2017. The quality of our communication and our performance with respect to non-financial indicators (environmental, social and governance Henkel Annual Report 2017 Shares and bonds 33 Employee share program Henkel bonds Since 2001, Henkel has offered an employee share program (ESP). For each euro invested in 2017 by an employee (limited to 4 percent of salary up to a maximum of 4,992 euros per year), Henkel added 33 eurocents. Around 11,600 employees in 54 countries purchased Henkel preferred shares under this pro- gram in 2017. At year-end, some 14,600 employees held a total of around 2.4 million shares, representing approximately 1.4 percent of total preferred shares outstanding. The lock-up period for newly acquired ESP shares is three years. Henkel issued fixed-rate bonds with a total volume of 2.2 billion euros in 2016: one with a volume of 500 million euros, a term of two years and a coupon rate of 0 percent per year; a second with a volume of 700 million euros and a term of five years, which bears interest of 0 percent per year. A further euro- dollar bond with a volume of 750 million US dollars was placed with a coupon rate of 1.5 percent per year and a term of three years, together with a 300 million British pound bond issue with a term of six years and a coupon rate of 0.875 percent per year. Investing in Henkel shares through participation in our share program has proven to be very beneficial for our employees in the past. Employees who invested 100 euros each month in Henkel shares since the pro- gram was first launched, and waived interim payouts, held portfolios valued at 93,702 euros at the end of 2017. This represents an increase in value of around 388 percent or an average yield of around 11.1 percent per year. Henkel placed a 600 million US dollar bond in the eurodollar market in June 2017. The bond has a term of three years and a coupon rate of 2.0 percent. The proceeds from the issue were used to finance Henkel’s acquisitions. The bond was substantially oversub- scribed and attracted widespread interest among international investors. Further information can be found on the website: www.henkel.com/creditor-relations Bond data Currency Volume Coupon Maturity Issue price Issue yield Tranche 1 EUR 500 million 0 % p.a. 9/13/2018 100.10 % – 0.05 % p.a. Tranche 2 EUR 700 million 0 % p.a. 9/13/2021 100 % 0 % p.a. 2016 Tranche 3 USD 750 million 1.5 % p.a. 9/13/2019 99.85 % 1.55 % Tranche 4 GBP 300 million 0.875 % p.a. 9/13/2022 99.59 % 0.95 % USD 600 million 2.0 % p.a. 6/12/2020 99.78 % 2.08 % 16 2017 Interest calculation Act / Act (ISMA) Act / Act (ISMA) 30 / 360 (ISMA) Act / Act (ISMA) 30 / 360 (ISMA) Denomination Sec. code no. ISIN Listing 1,000 EUR A2BPAW 1,000 EUR A2BPAX 2,000 USD A2BPAY 1,000 GBP A2BPAZ 2,000 USD A2E4FR XS1488370740 XS1488418960 XS1488419695 XS1488419935 XS1626039819 Regulated Market of the Luxembourg Stock Exchange 34 Shares and bonds Henkel Annual Report 2017 Pro-active capital market communication An active and open communication policy ensuring prompt and continuous information dissemination is a major component of the value-based manage- ment approach at Henkel. Hence shareholders, shareholder associations, participants in the capital market, financial analysts, the media and the public at large are kept informed of the current situation and major business changes relating to the Henkel Group. All stakeholders are treated equally in this respect. All such information is also promptly made available on the internet. Up-to-date information is likewise incorporated in the regular financial reporting undertaken by the corporation. The dates of the major recurring publi- cations, and also the dates for the press conference on the preceding fiscal year and the Annual General Meeting, are announced in our financial calendar, which is also available on the internet. The corporation’s advancements and targets in rela- tion to the environment, safety, health and social responsibility are published annually in our Sustain- ability Report. Shareholders, the media and the pub- lic at large are further provided with comprehensive information through press releases and information events, while occurrences with the potential to mate- rially affect the price of Henkel shares are communi- cated in the form of ad hoc announcements. Henkel is covered by numerous financial analysts at an international level. Around 30 equity and debt analysts regularly publish reports and commentaries on the current performance of the company. Henkel places great importance on dialog with inves- tors and analysts. At 23 capital market conferences and roadshows held in Europe, North America and Asia, institutional investors and financial analysts had an opportunity to engage with the company and, in many instances, directly with senior management. We also conducted regular telephone conferences and numerous one-on-one meetings. One highlight of our Investor Relations activities last year was our Investor and Analyst Day for the Beauty Care business unit, held on June 1, 2017, in Hamburg. Headlined as its “Beauty Addict Tour,” the business unit used the event to showcase its latest innova- tions and technologies. The Beauty Care manage- ment team also provided information about its strat- egy and business performance. Retail investors can obtain all relevant information on request or via the Investor Relations website at www.henkel.com/ir This also serves as the portal for the live broadcast of telephone conferences and parts of the Annual General Meeting (AGM). The AGM offers all shareholders the opportunity to obtain extensive information about the company directly. The quality of our capital market communication was again evaluated in 2017 by various independent rankings. In the Institutional Investor ranking, Henkel’s Investor Relations program was ranked third best in the European Household & Personal Care Products sector. We also came second in the two categories of Best Website and Best Analyst Day. A financial calendar with all important dates is pro- vided on the inside back cover of this Annual Report. Analyst recommendations 17 Sell 12 % Buy 44 % Hold 44 % At December 31, 2017 Basis: 32 equity analysts. Henkel Annual Report 2017 Corporate governance 35 Corporate governance at Henkel AG & Co. KGaA The Management Board, the Shareholders’ Commit- tee and the Supervisory Board are committed to ensuring that the management and stewardship of the corporation are conducted in a responsible and transparent manner aligned to achieving a long-term increase in shareholder value. With this in mind, they have pledged themselves to the following three principles: • Value creation as the foundation of our manage- ment approach • Sustainability achieved through the application of socially responsible management principles • Transparency supported by an active and open information policy The German Corporate Governance Code [DCGK] was introduced in order to promote confidence in the management and oversight of listed German corpo- rations. It sets out the nationally and internationally recognized regulations of responsible corporate gov- ernance and standards applicable in Germany. The DCGK is aligned to the statutory provisions applica- ble to a German joint stock corporation (“Aktienge- sellschaft” [AG]). It is applied analogously by Henkel AG & Co. KGaA (the corporation). For a better under- standing, this report describes the principles under- lying the management and control structure of the corporation. It also outlines the special features distinguishing us from an AG which derive from our specific legal form and our Articles of Association. The primary rights of shareholders of Henkel AG & Co. KGaA are likewise explained. The report takes into account the recommendations of the DCGK and contains all disclosures and explanations required according to Sections 289a (1), 315a (1) (disclosures concerning acquisitions), and 289f, 315d (corporate governance declaration) German Commercial Code [HGB]. Accordingly, the disclosures concerning acquisitions and the corporate governance declaration form part of the combined management report for Henkel AG & Co. KGaA and the Group, which has been audited by the external auditor. In this respect, Section 317 (2) sentence 6 HGB stipulates that any audit of the dis- closures pursuant to Sections 289f (2) and 315d HGB is limited to the question as to whether any infor- mation has actually been disclosed. Legal form / Special statutory features of Henkel AG & Co. KGaA Henkel is a “Kommanditgesellschaft auf Aktien” [KGaA]. A KGaA is a company with a legal identity (legal entity) in which at least one partner has unlim- ited liability with respect to the company’s creditors (personally liable partner). The other partners’ liabil- ity is limited to their shares in the capital stock and they are thus not liable for the company’s debts (limited partners per Section 278 (1) German Stock Corporation Act [AktG]). In terms of its legal structure, a KGaA is a mixture of a joint stock corporation [AG] and a limited partner- ship [KG], with a leaning toward stock corporation law. The differences with respect to an AG are pri- marily as follows: The duties of the executive board of an AG are performed at Henkel AG & Co. KGaA by Henkel Management AG – acting through its Man- agement Board – as the sole Personally Liable Partner (Sections 278 (2) and 283 AktG in conjunction with Art. 11 of our Articles of Association). The rights and duties of the supervisory board of a KGaA are more limited compared to those of the supervisory board of an AG. Specifically, the supervi- sory board is not authorized to appoint personally liable partners, preside over the partners’ contractual arrangements, impose procedural rules on the man- agement board, or rule on business transactions. A KGaA is not required to appoint a director of labor affairs, even if, like Henkel, the company is bound to abide by Germany’s Codetermination Act of 1976. The general meeting of a KGaA essentially has the same rights as the shareholders’ meeting of an AG. For example, it votes on the appropriation of earnings, elects members of the supervisory board (shareholder representatives), and formally approves the supervi- sory board’s actions. It appoints the auditor and also votes on amendments to the articles of association and measures that change the company’s capital, which are implemented by the management board. Additionally, as stipulated by the legal form, it also votes on the adoption of the annual financial state- ments of the company, formally approves the actions of the personally liable partner, and elects and approves the actions of the members of the sharehold- ers’ committee as established under the articles of association. Resolutions passed in general meeting 36 Corporate governance Henkel Annual Report 2017 require the approval of the personally liable partner where they involve matters which, in the case of a limited partnership, require the authorization of the personally liable partners and also that of the limited partners (Section 285 (2) AktG) or relate to the adoption of annual financial statements (Section 286 (1) AktG). According to our Articles of Association, in addition to the Supervisory Board, Henkel also has a standing Shareholders’ Committee comprising a minimum of five and a maximum of ten members, all of whom are elected by the General Meeting (Art. 27 of the Articles of Association). The Shareholders’ Commit- tee in particular performs the following functions (Section 278 (2) AktG in conjunction with Sections 114 and 161 HGB, and Articles 8, 9 and 26 of the Arti- cles of Association): • It participates in place of the General Meeting in the management of the corporation. • It decides on the appointment and dismissal of the Personally Liable Partners. • It holds both the power of representation and executive powers over the legal relationships prevailing between the corporation and Henkel Management AG, the Personally Liable Partner. • It exercises the voting rights of the corporation in the General Meeting of Henkel Management AG, thereby choosing its three-member Supervisory Board which, in turn, appoints and dismisses the members of the Management Board. • And it issues rules of procedure incumbent upon Henkel Management AG. Disclosures concerning acquisitions (Disclosures required under Sections 289a, 315a HGB and explanations) Composition of issued capital / Shareholders’ rights The capital stock of the corporation amounts to 437,958,750 euros. It is divided into a total of 437,958,750 bearer shares (of no par value) with each share representing a nominal proportion of the capital stock of 1 euro. Of this total, 259,795,875 are ordinary shares (total nominal proportion of capital stock: 259,795,875 euros, representing 59.3 percent) and 178,162,875 are preferred shares (total nominal proportion of capital stock: 178,162,875 euros, repre- senting 40.7 percent). All shares are fully paid in. Multiple share certificates for shares may be issued. In accordance with Art. 6 (4) of the Articles of Associ- ation, there is no right to individual share certificates. Each ordinary share grants to its holder one vote (Art. 21 (1) of the Articles of Association). The pre- ferred shares grant to their holders all shareholder rights apart from the right to vote (Sections 139 (1) and 140 (1) AktG). The preferred shares carry the fol- lowing preferential right in the distribution of profit (Section 139 (1) AktG in conjunction with Art. 35 (2) of the Articles of Association) unless otherwise resolved by the General Meeting: • The holders of preferred shares receive a preferred dividend in the amount of 0.04 euros per preferred share. If the profit to be distributed in a fiscal year is insufficient for payment of a preferred dividend of 0.04 euros per preferred share, the arrears are paid without interest from the profit of the follow- ing years, with older arrears to be paid in full before more recent arrears and the preferred divi- dend from the profit of a particular fiscal year paid only after the clearance of all arrears. The holders of ordinary shares then receive a preliminary divi- dend from the remaining unappropriated profit of 0.02 euros per ordinary share, with the residual amount being distributed to the holders of ordi- nary and preferred shares in accordance with the proportion of the capital stock attributable to them. • If the preferred dividend is not paid out either in part or in whole in a year, and the arrears are not paid off in the following year together with the full preferred share dividend for that second year, the holders of preferred shares are accorded voting rights until such arrears are paid (Section 140 (2) AktG). Cancellation or limitation of this preferred dividend requires the consent of the holders of preferred shares (Section 141 (1) AktG). The shareholders exercise their rights in the General Meeting as per the relevant statutory provisions and the Articles of Association of Henkel AG & Co. KGaA. In particular, they exercise the right to vote conveyed by the shares with voting rights – either personally, by postal vote, through a legal representative or through a proxyholder nominated by the corporation (Section 134 (3) and (4) AktG in conjunction with Art. 21 (2) and (3) of the Articles of Association) – and are also entitled to submit motions on the resolution proposals of management, speak on agenda items, raise pertinent questions and propose motions (Sections 126 (1) and 131 AktG in conjunction with Art. 23 (2) of the Articles of Association). The ordinary Annual General Meeting usually takes place within the first four months of the fiscal year. Shareholders whose shares jointly represent at least one twentieth of the capital stock – corresponding to 21,897,938 ordinary and / or preferred shares or a Henkel Annual Report 2017 Corporate governance 37 combination of both – may request that a general meeting of shareholders be called. If their propor- tionate amount of the capital stock jointly reaches 500,000 euros – corresponding to 500,000 ordinary and / or preferred shares or a combination of both – they may request that items be placed on the agenda and published (Section 122 (1) and (2) AktG). In addi- tion, shareholders whose combined share of the capital stock amounts to 100,000 euros or more may, subject to certain conditions, request that a special auditor be appointed by the court to examine certain matters (Section 142 (2) AktG). Through the use of electronic communications, particularly the internet, the corporation makes it easy for shareholders to participate in the General Meeting. It also enables them to be represented by proxyholders nominated by the corporation for exer- cising their voting rights. The reports, documents and information required by law for the Annual General Meeting, including the financial statements and annual reports, are made available on the internet, as are the agenda for the General Meeting and any countermotions or nominations for election by shareholders that require publication. Restrictions with respect to voting rights or the transfer of shares Generally, preferred shares do not convey any voting rights (Sections 139 (1), 140 (1) AktG; please refer to the discussion above for further details). Voting rights attached to treasury shares held by the com- pany (Section 71b AktG) and to ordinary shares for which the statutory notification requirement has not been met (Section 28 sentence 1 German Securities Trading Act [WpHG]) may not be exercised. The voting rights attached to ordinary shares are also excluded by law in the cases cited in Section 136 AktG (conflicts of interest surrounding ordinary shares held by members of the Management Board, Super- visory Board or Shareholders’ Committee). A share-pooling agreement has been concluded between members of the families of the descendants of company founder Fritz Henkel, pursuant to which the members agree on how to exercise the voting rights conveyed by their relevant ordinary shares in Henkel AG & Co. KGaA. The agreement also contains restrictions with respect to transfers of the ordinary shares covered (Art. 7 of the Articles of Association). Henkel preferred shares acquired by employees through the Employee Share Program, including bonus shares acquired without additional payment, are subject to a company-imposed contractual lock-up period of three years which begins on the first day of the respective participation period. The shares may not be sold before expiration of this lock-up period. If employee shares are sold during the lock-up period, the bonus shares are forfeited. Henkel preferred shares that will be acquired by employees through the Long Term Incentive (LTI) Plan 2020+, which was introduced on January 1, 2017, are also subject to a company-imposed contractual lock-up period and may not be sold before expiration of the four-year term of each tranche. Contractual agreements also exist with members of the Management Board governing lock-up periods for Henkel preferred shares which they are required to purchase out of their variable annual cash remu- neration (for additional information, please see the remuneration report on pages 46 to 57). Major shareholders According to notifications received by the corpora- tion, as of December 17, 2015, a total of 61.02 percent of the voting rights are held by members of the Henkel family share-pooling agreement (for additional infor- mation, please see the disclosures provided in the notes to the consolidated financial statements under Note 40 on pages 173 and 174.). No other direct or indirect investment in capital stock exceeding 10 percent of the voting rights has been reported to us or is known to us. Shares with special rights There are no shares carrying multiple voting rights, preference voting rights, maximum voting rights or special controlling rights. Statutory requirements and provisions in the Articles of Association governing the appointment and dismissal of members of the Management Board and amendment of the Articles of Association Decisions regarding the appointment and dismissal of Personally Liable Partners are taken by the General Meeting of Henkel AG & Co. KGaA. Henkel Manage- ment AG is the sole Personally Liable Partner of the corporation (Art. 8 (1) of the Articles of Association). The Supervisory Board of Henkel Management AG is responsible for the appointment and dismissal of members of the Management Board of Henkel Management AG (Management Board). The appoint- ments are for a maximum tenure of five years. A reappointment or extension of the tenure is permit- ted for a maximum period of five years in each case (Section 84 AktG). 38 Corporate governance Henkel Annual Report 2017 The Management Board is composed of at least two members in accordance with Art. 7 (1) of the Articles of Association of Henkel Management AG. The Supervisory Board of Henkel Management AG is fur- ther responsible for determining the number of members on the Management Board. The Supervi- sory Board can appoint a member of the Manage- ment Board as Chairperson. Unless otherwise mandated by statute or the Articles of Association, the resolutions of the Annual General Meeting of Henkel AG & Co. KGaA are adopted by simple majority of the votes cast. If a majority of cap- ital is required by statute, resolutions are adopted by simple majority of the voting capital represented (Art. 24 of the Articles of Association). This also applies to changes in the Articles of Association. However, modifications to the object of the corpora- tion require a three-quarters’ majority (Section 179 (2) AktG). The Supervisory Board and Shareholders’ Committee have the authority to resolve purely for- mal modifications of and amendments to the Arti- cles of Association (Art. 34 of the Articles of Associa- tion). By resolution of the General Meeting, the Supervisory Board is also authorized to amend Arti- cles 5 and 6 of the Articles of Association with respect to each use of the authorized capital and upon expiration of the term of the authorization. Authorization of the Management Board to issue or buy back shares According to Art. 6 (5) of the Articles of Association, there is an authorized capital. The Personally Liable Partner is authorized, with the approval of the Shareholders’ Committee and of the Supervisory Board, to increase the capital stock of the corpora- tion until April 12, 2020, by up to a nominal total of 43,795,875 euros through the issue of up to 43,795,875 new preferred shares with no voting rights against cash and / or payment in kind. The authorization may be utilized to the full extent allowed or in one or several installments. The proportion of capital stock represented by shares issued against payment in kind on the basis of this authorization must not exceed a total of 10 percent of the capital stock existing at the time the authori- zation takes effect. The Personally Liable Partner is authorized, with the approval of the Shareholders’ Committee and of the Supervisory Board, to set aside the pre-emptive rights of shareholders in the case of a capital increase against payment in kind, particularly for the purpose of business combinations or the (direct or indirect) acquisition of entities, operations, parts of businesses, equity interests or other assets, including claims against the corporation or com- panies dependent upon it within the meaning of Section 17 AktG. If capital is increased against payment in cash, all shareholders are essentially assigned pre-emptive rights. However, these may be set aside in three cases, subject to the approval of the Shareholders’ Committee and of the Supervisory Board: (1) in order to dispose of fractional amounts; (2) to grant to credi- tors / holders of bonds with warrants or conversion rights or a conversion obligation issued by the corpo- ration or one of the companies dependent upon it, pre-emptive rights corresponding to those that would accrue to such creditors / bondholders follow- ing exercise of their warrant or conversion rights or on fulfillment of their conversion obligations; or (3) if the issue price of the new shares is not signifi- cantly below the quoted market price at the time of issue price fixing. In addition, the Personally Liable Partner is autho- rized to purchase ordinary and / or preferred shares of the corporation at any time until April 12, 2020, up to a maximum nominal proportion of the capital stock of 10 percent. This authorization can be exer- cised for any legal purpose. To the exclusion of the pre-emptive rights of existing shareholders, treasury shares may, in particular, be transferred to third par- ties for the purpose of acquiring entities or partici- pating interests of entities. Treasury shares may also be sold to third parties against payment in cash, pro- vided that the selling price is not significantly below the quoted market price at the time of share disposal. The shares may likewise be used to satisfy warrants or conversion rights granted by the corporation. The Personally Liable Partner is also authorized, with the approval of the Shareholders’ Committee and of the Supervisory Board, to cancel treasury shares without the need for further resolution by the General Meeting. Insofar as shares are issued or used to the exclusion of pre-emptive rights, the proportion of capital stock represented by such shares shall not exceed 10 percent. Concerning the number of treasury shares and their use, please refer to the disclosures provided in the notes to the financial statements of Henkel AG & Co. KGaA, Note 10, on pages 9 and 10, and in the notes to the consolidated financial statements, Note 10, on pages 133 and 134. Henkel Annual Report 2017 Corporate governance 39 Corporate governance declaration (Disclosures required under Sections 289f, 315d HGB and explanations) Application of the German Corporate Gover- nance Code [DCGK] Taking into account the special features arising from our legal form and Articles of Association, Henkel AG & Co. KGaA complies with all recommendations (“shall” provisions) of the DCGK as amended. Taking into account the aforementioned special features arising from its legal form, the company has largely adopted the discretionary recommendations of the DCGK as amended on February 7, 2017. The recom- mendation in Item 2.3.3 to enable shareholders to follow general meetings online has been adopted to the extent that general meetings are broadcast pub- licly on the internet up to the conclusion of the address by the Chairman of the Management Board. The subsequent discussion of the agenda is not broadcast, in keeping with the character of a general meeting as an event that people attend in person. Henkel deviates from the recommendation in Item 4.2.3 to refrain from premature payment of remuner- ation components spanning several years insofar as all lock-up periods relating to investments in Henkel preferred shares that are financed by the recipients (share deferral) end if said recipient dies. By the same token, LTI entitlements with regard to out- standing tranches are settled on the basis of budget figures and paid to the heirs. The corresponding declarations of compliance together with the reasons for deviations from recom- mendations can be found on our website at www.henkel.com/ir Managers’ transactions In accordance with Article 19 (1) of the Market Abuse Regulation, members of the Management Board, the Supervisory Board and the Shareholders’ Committee, and parties related to same, are obliged to disclose notifiable transactions involving shares in Henkel AG & Co. KGaA or their derivative financial instru- ments where the value of such transactions by the member, or a party related to the member, attains or exceeds 5,000 euros in a calendar year. The transac- tions reported to the corporation in the past fiscal year were properly disclosed and can be seen on the website www.henkel.com/ir Principles of corporate governance / Compliance The members of the Management Board conduct the corporation’s business with the care of a prudent and conscientious business director in accordance with legal requirements, the Articles of Association of Henkel Management AG and the Articles of Associa- tion of Henkel AG & Co. KGaA, the rules of procedure governing the actions of the Management Board, the provisions contained in the individual contracts of employment of its members, and also the compliance guidelines and resolutions adopted by and within the Management Board. Corporate management principles which go beyond the statutory requirements are derived from our purpose, our vision, our mission and our values. For our corporation to be successful, it is essential that we share a common approach to entrepreneurship. We have defined a clear strategic framework with a long-term horizon. It guides us in making the right decisions and helps us to concentrate on our strategic priorities and focus strictly on our ambition for the future. We want to create value – for our customers and our consumers, for our people, for our shareholders as well as for the wider society and communities in which we operate. Our purpose: • Creating sustainable value. Our vision: • Leading with our innovations, brands and technologies. Our mission: • Serving our customers and consumers worldwide as the most trusted partner with leading positions in all relevant markets and categories – as a passionate team united by shared values. Our values: • We put our customers and consumers at the center of what we do. • We value, challenge and reward our people. • We drive excellent sustainable financial performance. • We are committed to leadership in sustainability. • We shape our future with a strong entrepreneurial spirit based on our family business tradition. 40 Corporate governance Henkel Annual Report 2017 The corporate bodies of Henkel and our employees worldwide are guided by this purpose, this vision, this mission, and these values. They reaffirm our ambition to meet the highest ethical standards in everything we do. And they guide our employees in all the day-to-day decisions they make, providing a compass for their conduct and actions. Henkel is committed to ensuring that all business transactions are conducted in an ethically irre- proachable, legal fashion. Consequently, Henkel expects all our employees not only to respect the cor- poration’s internal rules and all relevant laws, but also to avoid conflicts of interest, to protect Henkel’s assets and to respect the social values of the coun- tries and cultural environments in which the corpo- ration does business. The Management Board has therefore issued a series of Group-wide codes and standards with precepts that are binding worldwide. These regulatory instruments are not static, but are periodically reviewed and amended as appropriate, evolving in step with the changing legal and com- mercial conditions that affect Henkel as a globally active corporation. The Code of Conduct supports our employees in ethical and legal issues. The Lead- ership Principles, for example, define the scope of responsibilities for managers. The Code of Corporate Sustainability describes the principles that drive our sustainable, socially responsible approach to busi- ness. This code also enables Henkel to meet the com- mitments derived from the United Nations Global Compact. Ensuring compliance with laws and regulations is an integral component of our business processes. Henkel has established a Group-wide compliance organization with locally and regionally responsible compliance officers led by a globally responsible General Counsel & Chief Compliance Officer (CCO). The General Counsel & CCO, supported by the Corpo- rate Compliance Office and the interdisciplinary Compliance & Risk Committee, manages and con- trols compliance-related activities undertaken at the corporate level, coordinates training courses, over- sees fulfillment of both internal and external regula- tions, and takes appropriate action in the event of compliance violations. The local and regional compliance officers are responsible for organizing and overseeing the train- ing activities and implementation measures tailored to the specific requirements of their locations. They report to the Corporate Compliance Office. The Gen- eral Counsel & CCO reports regularly to the Manage- ment Board and to the Audit Committee of the Super- visory Board on identified compliance violations. The issue of compliance is also a permanent item in the target agreements signed by all managerial staff of Henkel. Due to their position, it is particularly incumbent on them to set the right example for their subordinates, to effectively communicate the com- pliance rules and to ensure that these are obeyed through the implementation of suitable organiza- tional measures. The procedures to be followed in the event of com- plaints or suspicion of malpractice also constitute an important element of the compliance policy. In addi- tion to our internal reporting system and complaint registration channels, employees may also, for the purpose of reporting serious violations to the Corporate Compliance Office, anonymously use a compliance hotline operated by an external service provider. The Head of the Corporate Compliance Office is mandated to initiate the necessary follow-up procedures. Our corporate compliance activities are focused on antitrust law and the fight against corruption. In our Code of Conduct, the corporate guidelines based upon it, and in other publications, the Management Board clearly expresses its rejection of all infringe- ments of the principles of compliance, particularly antitrust violations and corruption. We do not toler- ate such violations in any way. For Henkel, bribery, anticompetitive agreements, or any other violations of laws are no way to initiate or conduct business. A further compliance-relevant area relates to capital market law. Supplementing the legal provisions, internal codes of conduct have been put in place to regulate the treatment of information that has the potential to significantly affect share prices. The cor- poration has an Ad Hoc Committee comprised of representatives from various departments. In order to ensure that all insider information is handled as required by law, this Committee reviews develop- ments and events for their possible effect on share prices, determining the need to issue reports to the capital markets on an ad hoc basis. There are also rules that go beyond the legal requirements, govern- ing the behavior of the members of the Management Board, the Supervisory Board and the Shareholders’ Committee, and also employees of the corporation who, due to their function or involvement in projects, have access to insider information. Henkel Annual Report 2017 Corporate governance 41 Management and control structure Management Board As the executive body of the Group, the Management Board is bound to uphold the interests of the corpor- ation and is responsible for ensuring a sustainable increase in shareholder value. The members of the Management Board are responsible for managing Henkel’s business operations in their entirety. The individual Management Board members are assigned, in accordance with a business distribution plan, areas of competence for which they bear lead responsibility. The members of the Management Board cooperate closely as colleagues, informing one another of all major occurrences within their areas of competence and conferring on all actions that may affect several such areas. Further details relating to cooperation and the division of operational respon- sibilities within the Management Board are regulated by the rules of procedure issued by the Supervisory Board of Henkel Management AG. The Management Board reaches its decisions by a simple majority of the votes cast. In the event of a tie, the Chairperson has the casting vote. It is the duty of the Management Board to prepare the annual financial statements of Henkel AG & Co. KGaA, the consolidated financial statements and correspond- ing management reports, and the interim financial reports. The Management Board is responsible for management of the overall business including plan- ning, coordination, allocation of resources, financial control and risk management. It must also ensure compliance with legal provisions, regulatory require- ments and internal company guidelines, and take steps to ensure that Group companies also observe them. Supervisory Board and Shareholders’ Committee; (sub)committees It is the responsibility of the Supervisory Board to advise and supervise the Management Board in the performance of its business management duties. The Supervisory Board regularly discusses business per- formance and planning with the Management Board. It reviews the annual financial statements of Henkel AG & Co. KGaA and the Group’s consolidated financial statements together with the associated management reports, taking into account the reviews and audit reports submitted by the auditor. It also reviews the non-financial declaration. It likewise votes on the pro- posal of the Management Board regarding the appro- priation of profit, and submits to the General Meet- ing a proposal indicating its recommendation for the appointment of the external auditor. As a general rule, the Supervisory Board meets four times per year. It passes resolutions by a simple majority of the votes cast. In the event of a tie, the Chairperson has the casting vote. The Supervisory Board has established an Audit Committee and a Nominations Committee. The Audit Committee is made up of three share- holder and three employee representative members of the Supervisory Board. Each member is elected by the Supervisory Board based on nominations of their fellow shareholder or fellow employee representa- tives on the Board. The Chairperson of the Audit Committee is elected based on a proposal of the shareholder representative members. It is a statutory requirement that at least one independent member of the Supervisory Board has expertise in the fields of accounting or auditing. The Chairperson of the Audit Committee in 2017, Prof. Dr. Theo Siegert, who is not the Chairperson of the Supervisory Board nor a present or former member of the Management Board, satisfies these requirements. The Audit Committee, which generally meets four times a year, prepares the proceedings and resolutions of the Supervisory Board relating to the adoption of the annual financial statements and the consolidated financial statements, the review of the non-financial declaration and also the auditor appointment pro- posal to be made to the Annual General Meeting. It issues audit mandates to the auditor and defines the focal areas of the audit as well as deciding on the fee for the audit and other advisory services provided by the auditor. It monitors the independence and quali- fications of the auditor, requiring the latter to submit a declaration of independence which it then evalu- ates. Furthermore, the Audit Committee monitors the accounts and the accounting process and assesses the effectiveness of the Internal Control System, the Risk Management System and the Internal Auditing and Review System. It is likewise involved in compliance issues. The Group’s Internal Audit function reports regularly to the Audit Committee. Prior to publication, it discusses the quarterly state- ments and the financial report for the half year with the Management Board in a meeting that is also attended by the external auditor. The Nominations Committee comprises the Chair- person of the Supervisory Board and two further shareholder representatives elected by the Supervisory Board based on nominations of the shareholders’ representatives. The Chairperson of the Supervisory Board is also Chairperson of the Nominations Com- mittee. The Nominations Committee prepares the resolutions of the Supervisory Board on election 42 Corporate governance Henkel Annual Report 2017 proposals to be presented to the Annual General Meeting for the election of members to the Super- visory Board (shareholder representatives). The Shareholders’ Committee generally meets six times per year and holds a joint conference with the Management Board lasting several days. The Share- holders’ Committee reaches its decisions by a simple majority of the votes cast. It has established Finance and Human Resources subcommittees that likewise meet six times per year, as a rule. Each subcommittee comprises five of the members of the Shareholders’ Committee. The Finance Subcommittee deals primarily with financial matters, questions of financial strategy, financial position and structure, taxation and accounting policy, as well as risk management within the corporation. It also performs the neces- sary preparatory work for decisions to be made by the Shareholders’ Committee in matters for which decision authority has not been delegated to it. The Human Resources Subcommittee deals primar- ily with personnel matters relating to members of the Management Board, with issues pertaining to human resources strategy, and with remuneration. It performs the necessary preparatory work for deci- sions to be made by the Shareholders’ Committee in matters for which decision authority has not been delegated to it. The Subcommittee also addresses issues concerned with succession planning and management potential within the individual busi- ness units, taking into account relevant diversity aspects. At regular intervals, the Supervisory Board and the Shareholders’ Committee hold an internal review to determine the efficiency with which they and their committees / subcommittees carry out their duties. This self-assessment is performed on the basis of an extensive checklist, whereupon points relating to corporate governance and improvement opportuni- ties are also discussed. Conflicts of interest must be disclosed in an appro- priate manner to the Supervisory Board or Share- holders’ Committee, particularly those that may arise as the result of a consultancy or committee function performed in the service of customers, suppliers, lenders or other business partners. Members encoun- tering material conflicts of interest that are not of a merely temporary nature are required to resign their mandate. Some members of the Supervisory Board and of the Shareholders’ Committee are or were in past years holders of senior managerial positions in other com- panies. If and when Henkel pursues business activi- ties with these companies, the same arm’s length principles apply as those applicable to transactions with and between unrelated third parties. In our view, such transactions do not affect the impartiality of the members in question. Interaction between Management Board, Super- visory Board and Shareholders’ Committee The Management Board, Supervisory Board and Shareholders’ Committee work in close cooperation for the benefit of the corporation. The Management Board agrees the strategic direction of the corporation with the Shareholders’ Committee and discusses with it the status of strategy imple- mentation at regular intervals. In keeping with good corporate governance, the Management Board informs the Supervisory Board and the Shareholders’ Committee regularly, and in a timely and comprehensive fashion, of all relevant issues concerning business policy, corporate plan- ning, profitability, the business development of the corporation and our major affiliated companies, and also matters relating to risk exposure and risk management. For transactions of fundamental significance, the Shareholders’ Committee has established a right of veto in the procedural rules governing the actions of Henkel Management AG in its function as sole Personally Liable Partner (Art. 26 of the Articles of Association). This covers, in particular, decisions or measures that materially change the net assets, financial position or results of operations of the corporation. The Management Board complies with these rights of consent of the Shareholders’ Commit- tee and also duly submits to the decision authority of the corporation’s Annual General Meeting. Our Vision and Values, Code of Conduct, Code of Cor- porate Sustainability and other codes and policies governing our stewardship of the corporation can be found on our website www.henkel.com Henkel Annual Report 2017 Corporate governance 43 Targets for the proportion of women on the Management Board and in the first two management levels below the Management Board In accordance with Sections 76 (4) and 111 (5) AktG, targets must be set for the proportion of women on the Management Board and in the first two manage- ment levels below the Management Board. If the pro- portion of women is below 30 percent at the time the targets are set, the targets may not be below the pro- portion already achieved. Deadlines for achievement of the targets must be established at the same time and must not be longer than five years in each case. Proportion of women on the Management Board As part of its responsibility for Management Board composition, the Supervisory Board of Henkel Management AG has established a target, as recom- mended by the Shareholders’ Committee and its Human Resources Subcommittee, for the proportion of women on the Management Board of 17 percent, taking into account the current composition and an appropriate Management Board size for the corpora- tion. This proportion will apply, and the target will be met, in the period through to December 31, 2021. The proportion of women on the Management Board at December 31, 2017 was 17 percent. Proportion of women in the management levels below the Management Board Based on the current personnel mix, the Manage- ment Board has established the following targets for the first two levels of management below the Man- agement Board. These targets are expected to be achieved by December 31, 2021: • First management level: Proportion of 25 percent women • Second management level: Proportion of 30 per- cent women In accordance with the legal requirements, the point of reference for the definition of the management levels was based exclusively on Henkel AG & Co. KGaA and not the Henkel Group – regardless of Henkel’s globally aligned management organization. As a result, the figures include only employees of Henkel AG & Co. KGaA with management responsi- bility who report directly to the Management Board (management level 1) and those who report to man- agement level 1 (management level 2). Separately from the targets for the first two levels of management below the Management Board of Henkel AG & Co. KGaA – and mindful of our globally aligned management organization – it is our goal to increase our ratio of women at all levels of manage- ment at Henkel in the long term. In 2017, we were again able to raise the proportion of women in man- agement worldwide – to 34.5 percent at December 31, 2017. Statutory gender quota for Supervisory Board composition Given Henkel’s position as a listed corporation sub- ject to the Codetermination Act, the Supervisory Board of Henkel AG & Co. KGaA must consist of at least 30 percent women and at least 30 percent men (Section 96 (2) AktG). Throughout the entire year under review, the statu- tory minimum quota of each gender was represented among both the shareholder representatives and the employee representatives. Diversity considerations governing Manage- ment Board composition Notwithstanding the key requirements of qualifica- tion, competence and professional excellence for the relevant areas of responsibility on the Management Board, the Supervisory Board of Henkel Management AG has specified the following criteria – after consul- tation in the Shareholders’ Committee and its Human Resources Subcommittee – that must be considered when making Management Board appointments to ensure as broad a spectrum as possible of knowledge, skills and professional experience (diversity) on the Management Board: • Education / career experience Overall, the members of the Management Board must demonstrate knowledge, skills and profes- sional experience in the following areas in particular: • Management / leadership experience: Experience with managing globally operating entities, involvement of employee representative bodies, leading and motivating employees, succession planning. • Business acumen: Knowledge of / experience in industrial / consumer business areas and key markets, including the social environment in which Henkel operates, as well as knowledge of / experience in the fields of marketing, selling and distribution, digitalization / eCommerce, research and development, production / engi- neering and sustainable management. 44 Corporate governance Henkel Annual Report 2017 • Strategic expertise: Ability to develop and imple- ment prospects and strategies for the future. • Financial expertise: Experience in accounting, auditing financial statements, issues surround- ing funding and capital markets. • Financial control / risk management: Experience in the fields of internal control and risk manage- ment systems, as well as internal auditing systems. • Governance / compliance / ethics: Experience with interaction among corporate bodies (gover- nance) and in compliance with statutory / in-house requirements; modern understanding of corporate ethics and how to implement them. • Internationality The international activities of the corporation in both mature and emerging markets should be appropriately reflected in the composition of the Management Board. Henkel therefore strives to ensure that several members of different national- ities or with international backgrounds (who have spent many years working abroad or supervising foreign business activities, for example) are included on the Management Board. • Gender A reasonable proportion of women shall be repre- sented in the Management Board. Henkel there- fore strives to ensure that at least one woman is a member of the Management Board. • Seniority Change and continuity are two issues that must be taken into reasonable account when composing the Management Board. Henkel therefore aims to include members with different levels of seniority on the Management Board. Irrespective of this requirement, members of the Management Board should generally not be older than 63. We believe that these aforementioned requirements were met in full in the reporting period. Overall, the Management Board, which includes one woman, has the knowledge, skills and professional experience needed to properly and effectively per- form its duties. Several members of the Management Board have international business experience with both emerging and mature markets. No individual on the Management Board exceeds the specified maximum age. Diversity considerations / Objectives governing Supervisory Board composition Bearing in mind the new legal requirements speci- fied by the CSR Directive Implementation Act and the recommendations of the DCGK, and taking into account the specific situation and global reach of the company’s activities in industrial and consumer business areas, the Supervisory Board reviewed and updated the objectives governing its composition in 2017. When proposing candidates to the Annual Gen- eral Meeting for both routine reelection and replace- ment election, the Supervisory Board must consider the following objectives, whereby the particular reg- ulations of the Codetermination Act must be observed with regard to the elected employee representatives. • Education / Career experience Overall, the Supervisory Board must demonstrate knowledge, skills and professional experience in the following areas in particular: • Management / leadership experience: Experience with managing globally operating corpora- tions / companies and with employee manage- ment. • Business acumen: Knowledge of / experience in the fields of research and development, pro- duction / engineering, marketing, selling and distribution, digitalization / eCommerce, as well as knowledge of / experience in industrial / consumer business areas, in the key markets in which Henkel operates, and in sustainable management. • Financial expertise: Experience in the fields of accounting / accounting processes or with audit- ing financial statements, knowledge of financial instruments and funding strategies. • Financial control / risk management: Experience in the fields of internal control and risk manage- ment systems, as well as internal auditing sys- tems. • Governance / compliance: Experience with inter- action among corporate bodies (governance) and in ensuring compliance with statutory / in-house requirements. • Impartiality, integrity To ensure the impartiality of its counseling activi- ties and supervision of the Management Board, the Supervisory Board must include a reasonable number of impartial members, bearing in mind the company’s ownership structure. As a rule, the following people should not belong to the Supervisory Board: • Close family members of a Management Board member. Henkel Annual Report 2017 Corporate governance 45 • Anyone who, in the past three years, has been a partner of or in the employ of the present or previous external auditors of the corporation. • Anyone who receives or has received over the past three years not inconsiderable remunera- tion of any nature from Henkel AG & Co. KGaA or one of its affiliates (excluding remuneration for Supervisory Board or Shareholders’ Committee membership or, in the case of employee repre- sentatives, their salaries). • Anyone with direct or indirect material business ties to Henkel AG & Co. KGaA or one of its affili- ates, whether as partner, shareholder, member of the management body or executive of the company with which this business relationship exists. Assuming that the exercise of their Supervisory Board mandate by the employee representatives as such does not constitute a basis for doubt as to whether the independence criteria as defined by Item 5.4.2 of the DCGK are fulfilled, the Supervisory Board should include at least 13 members who are impartial as defined by the DCGK. In keeping with the ownership structure and the corporation’s tradi- tion as an open family business to which the Henkel family has been committed ever since the company was founded in 1876, possession of a controlling interest or attribution of a controlling interest due to membership in the Henkel family share-pooling agreement is not viewed as a circumstance that creates a conflict of interest in the meaning above. Membership of the Shareholders’ Committee or of the Supervisory Board of Henkel Management AG is compatible with Supervisory Board membership. As a rule, however, at least three of the shareholder repre- sentatives on the Supervisory Board should be neither members of the share-pooling agreement nor members of the Shareholders’ Committee nor members of the Supervisory Board of Henkel Management AG, and they must be named accordingly in the corporate governance report. Moreover, no more than two former members of the Management Board should be elected to the Super- visory Board, nor people • who – if members of a Management Board of a listed company – exercise more than three Supervisory Board mandates in total for non- Group listed companies or for non-Group com- panies with similar requirements, • or who perform management or advisory tasks for material competitors. Also, as a rule, nobody should be proposed to the Annual General Meeting for election to the Super- visory Board who, at the time of the election, has already served more than two full terms of office on the Supervisory Board. However, to ensure continu- ity, members may also serve on the Supervisory Board for longer periods of time in individual cases. In keeping with the ownership structure and the corpo- ration’s tradition as an open family business, this applies particularly to members of the Henkel family share-pooling agreement. Members of the Supervisory Board should, moreover, be capable of duly upholding Henkel’s reputation in the public domain. • Availability When proposing new candidates to the Annual General Meeting for election to the Supervisory Board, the Supervisory Board must make sure that the relevant candidates can devote the anticipated time to the task. • Internationality The international activities of the corporation should be appropriately reflected in the composi- tion of the Supervisory Board. Henkel therefore strives to ensure that several members with inter- national backgrounds (who have spent many years working abroad or supervising foreign business activities, for example) are included on the Super- visory Board. • Gender A reasonable proportion of women shall be appointed to the Supervisory Board. The statutory minimum requirement of 30 percent is deemed to be reason- able. Henkel strives to increase the proportion of women when new or replacement members are elected. • Age The Supervisory Board should include representa- tives from different generations / age groups. Henkel therefore aims to include members from different generations / age groups on the Supervi- sory Board. Irrespective of the aforementioned, nobody should, as a rule, be proposed to the Annual Gen- eral Meeting for election to the Supervisory Board who, at the time of the election, has already reached their 70th birthday. In addition to the statutory minimum quota, we believe that these aforementioned requirements were met in full in the reporting period. 46 Corporate governance Henkel Annual Report 2017 Among the 16 members of the Supervisory Board are ten men and six women. Shareholder representatives consist of six men and two women, while the employee representatives consist of four men and four women. This represents an overall ratio on the Supervisory Board of around 62 percent men and 38 percent women. Overall, the Supervisory Board has the knowledge, skills and professional experience needed to prop- erly and effectively perform its duties. In addition, several members of the Supervisory Board offer international business experience or other interna- tional expertise. No individual on the Supervisory Board exceeds the specified maximum age. None of the Supervisory Board members elected by the Annual General Meeting is a former Management Board member, or performs board or committee functions or acts as a consultant for major competi- tors, and none are persons whose business or per- sonal relationship with the corporation or members of the Management Board could give rise to material conflicts of interest that are not of a merely tempo- rary nature. Four of the eight shareholder representa- tives – Barbara Kux, Timotheus Höttges, Prof. Dr. Michael Kaschke and Prof. Dr. Theo Siegert – are not party to the Henkel family share-pooling agreement and – apart from Dr. Simone Bagel-Trah – none of the shareholder representatives in office is a member of the Shareholders’ Committee or the Supervisory Board of Henkel Management AG. For more details on the composition of the Manage- ment Board, Supervisory Board and the Shareholders’ Committee or the (sub)committees established by the Supervisory Board and Shareholders’ Committee, please refer to pages 184 to 187. Details of the com- pensation of the Management Board, the Supervisory Board and the Shareholders’ Committee can be found in the remuneration report that follows. Remuneration report This remuneration report provides an outline of the compensation system for the Management Board, Henkel Management AG as the Personally Liable Part- ner, the Supervisory Board and the Shareholders’ Com- mittee of Henkel AG & Co. KGaA, and the Supervisory Board of Henkel Management AG; it also explains the level and structure of the remuneration paid. The report takes into account the recommendations of the German Corporate Governance Code [DCGK] and contains all disclosures and explanations pursuant to the provisions of the German Commercial Code [HGB] and the appropriate principles of German Accounting Standards [DRS], and as required by International Financial Reporting Standards (IFRSs). The remunera- tion report forms part of the combined management report for Henkel AG & Co. KGaA and the Group, which has been audited by the external auditor; the associ- ated information is not additionally disclosed in the notes to the consolidated financial statements (Sections 289a (2), 315a (2) HGB). 1. Remuneration of members of the Management Board Regulation, structure and amounts The compensation for members of the Management Board of Henkel Management AG is set by the Super- visory Board of Henkel Management AG in consultation with the Human Resources Subcommittee of the Shareholders’ Committee. The Supervisory Board of Henkel Management AG is comprised of three mem- bers of the Shareholders’ Committee. The structure and amounts of Management Board remuneration are aligned to the size and international activities of the corporation, its economic and finan- cial position, its performance and future prospects, the normal levels of remuneration encountered in compa- rable companies, and also the general compensation structure within the corporation. The compensation package is further determined on the basis of the func- tions, responsibilities and personal performance of the individual executives, and the performance of the Management Board as a whole. The variable annual remuneration components have been devised such that they take into account both positive and negative developments. The overall remuneration mix is designed to be internationally competitive while also providing an incentive for sustainable business devel- opment and a sustainable increase in shareholder value in a dynamic environment. Henkel Annual Report 2017 Corporate governance 47 The Supervisory Board of Henkel Management AG regularly reviews the compensation system as well as the appropriateness of the compensation, based on the aforementioned criteria. In doing so, Management Board remuneration is analyzed relative to the com- pensation paid to senior management and the staff as a whole, both overall and over time, whereby the Supervisory Board of Henkel Management AG deter- mines the boundaries between senior management and relevant staff members. Members of the Management Board receive remunera- tion consisting of non-performance-related compo- nents and variable, performance-related components. The non-performance-related compensation is made up of their fixed salary together with various in-kind and other benefits (other emoluments). The variable performance-related compensation has two parts. The first is a variable annual cash payment (short-term incentive or “STI”), 65 percent of which is short-term variable cash remuneration and 35 percent of which is long-term variable cash remuneration in the form of an investment financed by the recipient in Henkel preferred shares (share deferral). The second is a variable cash payment based on the long-term performance of the business (long-term incentive or “LTI”). The variable remuneration targeting long-term performance thus consists of the share deferral and the LTI. If all performance targets are met in full (“at target”) – subject to comparability of the relevant areas of responsibility – around 21 percent of the remuneration (excluding other emoluments and pension benefits) is paid as the fixed component, while the STI and share deferral account for around 56 percent, and the LTI for around 23 percent. Pension benefits also form part of the remuneration package. In addition, the Supervisory Board of Henkel Management AG may, at its discretion and after due consideration, grant a special payment in recognition of exceptional achievements. The components in detail: Non-performance-related components Fixed remuneration The fixed remuneration takes into account the assigned function and responsibility and the market conditions. It is paid out monthly as salary and amounts to 1,200,000 euros per year for the Chairman of the Management Board and 750,000 euros per year for the other Management Board members. Other emoluments The members of the Management Board also receive other emoluments, primarily in the form of costs asso- ciated with, or the cash value of, in-kind benefits and other fringe benefits such as standard commercial insurance policies, reimbursement of accommoda- tion / moving costs, provision of a company car or use of a car service, including any taxes on same, and the costs of preventive medical examinations. All mem- bers of the Management Board are entitled, in princi- ple, to the same emoluments, whereby the amounts vary depending on personal situation. Performance-related components Variable annual cash remuneration The performance criteria governing the variable annual cash remuneration (STI) are return on capital employed (ROCE) and earnings per preferred share (EPS) in the relevant fiscal year (“year of payment”), adjusted in each case for exceptional items, together with separate targets for each individual member. The ROCE targets are derived from a strategic target yield. EPS performance is measured on the basis of actual-to-actual comparison, i.e. the EPS in the year of payment is compared to the EPS from the previous year. Thresholds have been defined for both key financials; payment is withheld if the minimum targets are not met. If adjusted EPS in the year of payment is more than 25 percent above or below the comparable prior-year figure as a result of extraordinary events, the Supervisory Board of Henkel Management AG may, at its discretion and after due consideration, decide to adjust the target within this corridor, or may determine a new reference value for measuring performance in the following year. The STI is calculated on the basis of a 40-percent weighting each of ROCE and EPS performance in the year of payment, and a 20-percent weighting of indi- vidual targets. The following factors play a key role in measuring individual performance: the Group results and the results of the relevant business unit, the qual- ity of management demonstrated in those business units, and the individual contribution made by the Management Board member concerned. The applica- tion of these performance parameters ensures that profitable growth is duly rewarded by Henkel. 48 Corporate governance Henkel Annual Report 2017 Remuneration structure Target remuneration Long-term incentive (LTI) Proportion of target remuneration: around 23 % Cap: max. 150 % of the target amount Long-term cash remuneration Share deferral (35 % STI) 18 Type of remuneration LTI performance criterion: Future increase in adjusted EPS over a 3-year period Variable annual cash remuneration (STI) Proportion of target remuneration: around 56 % Cap: max. 150 % of the target amount Short-term variable cash remuneration (65 % STI) STI performance criteria: ROCE, EPS, adjusted in each case, weighting of 40 % in each case; individual targets, weighted at 20 % Fixed remuneration Proportion of target remuneration: around 21 % Non-performance- related components Performance-related components, short-term Performance-related components, long-term share deferral ensures that the members of the Man- agement Board participate through a portion of their compensation in the long-term performance of the corporation. Long-term incentive (LTI) The long-term incentive is a variable cash payment based on the long-term performance of the corpora- tion, the amount payable being dependent on the future increase registered in EPS over three consecu- tive years (the performance period). On completion of the performance period, target achievement is ascertained by the Supervisory Board of Henkel Management AG on the basis of the increase in EPS attained. The EPS of the fiscal year preceding the year of payment is compared to the EPS of the second fiscal year following the year of payment. The figures used for the calculation of the increase are, in each case, the earnings per preferred share adjusted for exceptional items, as disclosed in the certified and approved consolidated financial statements of the relevant fiscal years. The total amount of the LTI is subject to a cap of 150 percent of the target amount. In determining the STI, the Supervisory Board of Henkel Management AG also takes into account the apparent sustainability of the economic performance delivered in the course of the year, and the perfor- mance levels of the Management Board members. The total amount of the STI is subject to a cap of 150 percent of the target amount. Short-term and long-term components of the variable annual cash remuneration The STI is paid annually in arrears in the full amount in cash once the corporation’s annual financial state- ments have been approved by the Annual General Meeting. The recipients can dispose of around 65 per- cent of this payment as they wish. This constitutes their short-term variable cash remuneration. The members of the Management Board invest the remain- der of the relevant payment amount, corresponding to around 35 percent, in Henkel preferred shares. This constitutes their long-term variable cash remunera- tion, known as the share deferral. These shares are placed in a blocked custody account with a drawing restriction. The company transfers the relevant invest- ment amount of each individual directly to the bank responsible for settling the investment transactions and managing the blocked custody account. On the first trading day of the month following payout, this bank invests the relevant amount on behalf and for the account of the member of the Management Board in Henkel preferred shares at the price prevailing at the time of purchase on the stock exchange, and credits the acquired shares to the blocked custody account. The lock-up period in each case expires on December 31 of the fourth year following the year of payment. This Henkel Annual Report 2017 Corporate governance 49 Provisions governing termination of position on the Management Board If an active member of the Management Board who was first appointed prior to 2009 retires, or dies while still in office, payment of their fixed remuneration continues for a further six months, but not beyond their 65th birthday. In the event of death in service, the payments are made to the surviving spouse or entitled dependent children. In the event that a member’s position on the Manage- ment Board is terminated prematurely without cause and by mutual agreement, the executive contract provides for a severance settlement amounting to the remuneration for the remaining contractual term (fixed remuneration plus variable annual remunera- tion). These severance payments are limited to a maxi- mum of two years’ compensation (severance payment cap) and may not extend over a period that exceeds the residual term of the executive contract. Members of the Management Board are not entitled to severance payment if an executive contract is terminated by mutual agreement at the request of the individual or because that executive has been dismissed by the corporation for good cause or reason. In the event that the sphere of responsibility / executive function is altered or restricted to such an extent that it is no longer comparable to the position prior to the change or restriction, the affected members of the Management Board are entitled to resign from office and request premature termination of their contract. In such cases, members are entitled to severance payments amount- ing to not more than two years’ compensation. Special payments Above and beyond the aforementioned remuneration components, the Supervisory Board of Henkel Man- agement AG may, at its discretion and after due consid- eration, grant a special payment in recognition of exceptional achievements. Such special payment is limited to an amount equating to the respective Man- agement Board member’s fixed salary; the maximum compensation level – as determined by remuneration for a fiscal year if the caps on STI and LTI are reached – may not be exceeded as a result of such payment. Caps on remuneration Taking into account the above-mentioned caps for the variable performance-related components of remuner- ation, the minimum and maximum remuneration amounts shown below result for a full fiscal year (excluding other emoluments and pension benefits). Pension benefits (retirement pensions and survivors’ benefits) The company has been operating a purely defined contribution pension system since January 1, 2015. Accordingly, members of the Management Board now receive a superannuation lump-sum payment comprised of the total annual contributions to the plan during their time in office. The annual contribu- tions – based on a full fiscal year – are 750,000 euros for the Chairman and 450,000 euros each for the other members of the Management Board. An entitlement to pension benefits arises on retire- ment, on termination of the employment relationship on or after attainment of the statutory retirement age, in the event of death, or in the event of permanent complete incapacity for work. If a member of the Management Board has received no pension benefits prior to their death, the superannuation lump sum accumulated up to time of death is paid out to the surviving spouse or surviving children. Caps on remuneration 19 in euros Chairman of the Management Board Ordinary member of the Management Board* Fixed remuneration Short-term variable cash remuneration Long-term variable cash remuneration (share deferral) Long-term incentive, conditional entitlement Total compensation minimum Total compensation maximum 1,200,000 0 to 3,315,000 0 to 1,785,000 0 to 2,100,000 1,200,000 8,400,000 750,000 0 to 1,950,000 0 to 1,050,000 0 to 1,200,000 750,000 4,950,000 * in each case, for a factor of 1 for fixed remuneration, STI and LTI. 50 Corporate governance Henkel Annual Report 2017 Upon an executive’s departure from the Management Board, the STI is calculated pro rata and paid out. Unless otherwise agreed individually, LTI entitlements are calculated at the end of the relevant performance period and paid out. However, entitlements from any tranche whose performance period has not yet ended at the date of departure are forfeited without replace- ment if the departure is based on good cause or reason that would have justified revocation of the appoint- ment or termination of the employment contract. All lock-up periods relating to investments in Henkel pre- ferred shares that are financed by the recipients (share deferral) end if said recipient dies. By the same token, LTI entitlements with regard to outstanding tranches are settled on the basis of budget figures and paid to the heirs. In addition, the executive contracts include a post-con- tractual non-competition clause with a term of two years. Members of the Management Board are entitled to a discretionary payment totaling 50 percent of the annual compensation, which is payable in 24 monthly installments unless the Supervisory Board of Henkel Management AG waives the non-competition clause. Any severance payments and any earnings from new extra-contractual activities during the non-competi- tion period are offset against this discretionary pay- ment. No entitlements exist in the event of premature termination of executive duties resulting from a change in control. Miscellaneous The corporation maintains directors and officers insurance (D&O insurance) for directors and officers of the Henkel Group. For members of the Management Board there is a deductible amounting to 10 percent per loss event, subject to a maximum for the fiscal year of one and a half times their annual fixed remuneration. The company does not grant any loans or advances to members of the Management Board. Remuneration of members of the Manage- ment Board for fiscal 2017 Excluding pension entitlements, the total compensa- tion paid to members of the Management Board for the performance of their duties for and on behalf of Henkel AG & Co. KGaA and its subsidiaries during the year under review amounted to 25,326,382 euros (previ- ous year: 26,503,197 euros). Fixed salaries accounted for 4,950,000 euros (previous year: 5,075,000 euros), other emoluments for 390,083 euros (previous year: 422,137 euros), short-term variable cash remuneration for 9,532,967 euros (previous year: 10,143,939 euros), long-term variable cash remuneration – share defer- ral – for 5,133,135 euros (previous year: 5,462,121 euros) and the long-term incentive for 5,320,197 euros (previ- ous year: 5,400,000 euros). In accordance with legal regulations, the value of the long-term incentive granted for 2017, which is payable in 2020 contingent on the achievement of performance targets, is recog- nized here based on the target amount that would be paid assuming a 30-percent increase in EPS per preferred share within the performance period. Compensation for the reporting period granted to members of the Management Board serving in 2017, separated into the above-mentioned components, is shown in the following table. The amounts in this table and the tables that follow have been rounded up or down to full euros. As a result, the rounded figures in some of the rows in the tables may not add up to the totals as indicated. Pascal Houdayer left the company by mutual agree- ment on October 31, 2017. In connection with the termination of his contract, his entitlements from the Short Term Incentive 2017 (pro rata) were settled, as contractually agreed, through payment of 1,590,200 euros gross, and the entitlements accumulated in 2016 and 2017 (pro rata) from the Long Term Incentive were settled through payment of 1,264,640 euros gross in total. Furthermore, he received severance pay of 5,120,400 euros gross in October 2017 in recognition of his contractual entitlement to remuneration for the remaining term of his contract. In addition, he is bound by a post-contractual non-competition clause with a term of two years. This entitles him to compen- sation of 71,095 euros gross per month for the remain- ing period not already covered by the severance payment; other earnings shall be offset against this discretionary payment. In the year under review, no member of the Manage- ment Board was granted non-standard benefits by the company in connection with premature termination of their tenure, nor were any such entitlements or arrange- ments modified. No member of the Management Board was pledged payments from third parties in respect of their duties as executives of the company, nor were any such payments granted in the reporting period. Henkel Annual Report 2017 Corporate governance 51 Remuneration of Management Board members who served in 2017 20 1. Fixed salary 1 2. Other emoluments 1 3. Short-term variable cash remunera- tion 1 Single-year remuneration (Total of 1 to 3) 4. Long-term variable cash remuneration (share deferral) 1 5. Long-term incentive 2 Multi-year remuneration (Total of 4 and 5) Total remuneration (Total of 1 to 5) 2017 1,200,000 56,648 2,486,755 3,743,403 1,339,022 1,400,000 2,739,022 6,482,425 2016 1,050,000 119,576 2,046,007 3,215,583 1,101,696 1,066,667 2,168,363 5,383,946 2017 750,000 47,540 1,498,165 2,295,705 806,704 800,000 1,606,704 3,902,409 2016 750,000 45,208 1,511,755 2,306,963 814,022 800,000 1,614,022 3,920,985 2017 625,000 50,113 1,033,630 1,708,743 556,570 613,530 1,170,100 2,878,843 2016 625,000 90,504 1,192,629 1,908,133 642,185 651,110 1,293,295 3,201,428 2017 750,000 67,811 1,498,165 2,315,976 806,704 800,000 1,606,704 3,922,680 2016 750,000 53,903 1,563,755 2,367,658 842,022 800,000 1,642,022 4,009,680 2017 750,000 95,165 1,377,915 2,223,080 741,954 800,000 1,541,954 3,765,034 2016 750,000 36,151 1,459,755 2,245,906 786,022 800,000 1,586,022 3,831,928 2017 750,000 47,588 1,449,415 2,247,003 780,454 800,000 1,580,454 3,827,457 2016 750,000 44,622 1,563,755 2,358,377 842,022 800,000 1,642,022 4,000,399 2017 125,000 25,218 188,922 339,140 101,727 106,667 208,394 547,534 2016 – – – – – – – – in euros Hans Van Bylen (Chairman) (since 5/1/2016) Member of the Manage- ment Board since 7/1/2005 Jan-Dirk Auris (Adhesive Technologies) Member of the Manage- ment Board since 1/1/2011 Pascal Houdayer 3 (Beauty Care) Member of the Manage- ment Board from 3/1/2016 to 10/31/2017 Carsten Knobel (Finance) Member of the Manage- ment Board since 7/1/2012 Kathrin Menges (Human Resources) Member of the Manage- ment Board since 10/1/2011 Bruno Piacenza (Laundry & Home Care) Member of the Manage- ment Board since 1/1/2011 Jens-Martin Schwärzler (Beauty Care) Member of the Manage- ment Board since 11/1/2017 Total 2017 4,950,000 390,083 9,532,967 14,873,050 5,133,135 5,320,197 10,453,332 25,326,382 2016 4,675,000 389,964 9,337,656 14,402,620 5,027,969 4,933,334 9,961,303 24,348,366 1 The payout is reported pursuant to HGB / IFRS. 2 Target amount pursuant to HGB / IFRS, based on a 30-percent increase in adjusted earnings per preferred share within the performance period of three years. LTI payout for 2017 occurs in 2020; LTI payout for 2016 occurs in 2019. 3 Pascal Houdayer left the company by mutual agreement on October 31, 2017. In connection with the termination of his contract, his entitlements from the Short Term Incentive 2017 (pro rata) were settled, as contractually agreed, through payment of 1,590,200 euros gross, and the entitlements accumulated in 2016 and 2017 (pro rata) from the Long Term Incentive were settled through payment of 1,264,640 euros gross in total. Furthermore, he received severance pay of 5,120,400 euros gross in October 2017 in recognition of his contractual entitlement to remuneration for the remaining term of his contract. In addition, he is bound by a post-contractual non-competition clause with a term of two years. This entitles him to compensation of 71,095 euros gross per month for the remain- ing period not already covered by the severance payment; other earnings shall be offset against this discretionary payment. 52 Corporate governance Henkel Annual Report 2017 Structure of remuneration of Management Board members who served in 2017 21 Components of single-year remuneration Components of multi-year remuneration Fixed remuneration Other emoluments Short-term variable cash remuneration Long-term variable cash remuneration (share deferral) Long-term incentive Total remuneration 2017 4,950,000 390,083 9,532,967 5,133,135 5,320,197 25,326,382 19.6 % 1.5 % 37.6 % 20.3 % 21.0 % 100.0 % 2016 4,675,000 389,964 9,337,656 5,027,969 4,933,334 24,363,923 19.1 % 1.6 % 38.3 % 20.6 % 20.4 % 100.0 % in euros Total Total Pension benefits The figures calculated in accordance with the German Commercial Code [HGB] and International Accounting Standard (IAS) 19 for service cost in respect of entitlements acquired in the reporting year, and the present value of total pension benefits accruing to the end of the fiscal year, are shown in the following table: Service cost / Present value of pension benefits 22 in euros Hans Van Bylen Jan-Dirk Auris Pascal Houdayer (from 3/1/2016 to 10/31/2017) Carsten Knobel Kathrin Menges Bruno Piacenza Jens-Martin Schwärzler (since 11/1/2017) Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 HGB IAS Service cost for pension benefits in the reporting year Present value of pension benefits as of December 31 Service cost for pension benefits in the reporting year Present value of pension benefits as of December 31 767,916 664,026 460,860 458,482 377,418 379,457 460,036 457,974 459,233 457,067 458,647 456,353 173,706 – 3,157,816 2,873,359 7,526,791 6,319,207 3,815,974 3,147,578 1,130,357 623,140 3,120,002 2,492,714 3,188,528 2,557,853 3,181,500 2,555,923 1,111,875 – 23,075,027 17,696,415 767,944 664,043 461,600 458,996 377,480 379,457 461,860 459,243 459,882 457,533 458,721 456,400 179,972 – 3,167,459 2,875,672 8,053,190 6,958,733 3,961,485 3,325,032 1,130,357 623,496 3,256,629 2,658,267 3,267,118 2,652,810 3,186,993 2,562,467 1,258,609 – 24,114,381 18,780,805 For pension obligations to former members of the Management Board and the management of Henkel KGaA, as well as the former management of its legal predecessor and surviving dependents, 102,214,945 euros (previous year: 100,771,135 euros) is deferred. Amounts paid to such recipients during the year under review totaled 7,265,411 euros (previous year: 7,127,205 euros). Disclosures in accordance with the German Corporate Governance Code [DCGK] In accordance with the recommendations of the DCGK, the following tables show a) the benefits granted for fiscal 2017, including the maximum and minimum achievable compensa- tion for variable remuneration components, and b) the allocation for fiscal 2017. Henkel Annual Report 2017 Corporate governance 53 Pursuant to DCGK, payments / benefits granted for the reporting year to members of the Management Board serving in 2017 1. Fixed salary 1 2. Other emolu- ments 1 Total (1 and 2) 3. Short- term variable cash remunera- tion 2 4. Long- term vari- able cash remunera- tion (share deferral) 2 5. Long- term incentive 3 Total (1 to 5) 6. Service cost 4 23 Total remu- neration pursuant to DCGK (Total of 1 to 6) in euros Hans Van Bylen (Chairman) (since 5/1/2016) Member of the Management Board since 7/1/2005 Jan-Dirk Auris (Adhesive Technologies) Member of the Management Board since 1/1/2011 Pascal Houdayer 5 (Beauty Care) Member of the Management Board from 3/1/2016 to 10/31/2017 Carsten Knobel (Finance) Member of the Management Board since 7/1/2012 Kathrin Menges (Human Resources) Member of the Management Board since 10/1/2011 Bruno Piacenza (Laundry & Home Care) Member of the Management Board since 1/1/2011 Jens-Martin Schwärzler (Beauty Care) Member of the Management Board since 11/1/2017 2017 1,200,000 56,648 1,256,648 2,308,691 1,243,141 1,400,000 6,208,480 767,944 6,976,424 2017 (min) 1,200,000 56,648 1,256,648 0 0 0 1,256,648 767,944 2,024,592 2017 (max) 1,200,000 56,648 1,256,648 3,315,000 1,785,000 2,100,000 8,456,648 767,944 9,224,592 2016 2017 1,050,000 119,576 1,169,576 1,944,260 1,046,909 1,066,667 5,227,413 664,043 5,891,456 750,000 47,540 797,540 1,358,054 731,260 800,000 3,686,854 461,600 4,148,454 2017 (min) 750,000 47,540 797,540 0 0 0 797,540 461,600 1,259,140 2017 (max) 750,000 47,540 797,540 1,950,000 1,050,000 1,200,000 4,997,540 461,600 5,459,140 2016 2017 750,000 45,208 795,208 1,425,695 767,682 800,000 3,788,585 458,996 4,247,581 625,000 50,113 675,113 1,131,712 609,383 666,667 3,082,875 377,480 3,460,355 2017 (min) 625,000 50,113 675,113 0 0 0 675,113 377,480 1,052,593 2017 (max) 625,000 50,113 675,113 1,625,000 875,000 1,000,000 4,175,113 377,480 4,552,593 2016 2017 625,000 90,504 715,504 1,188,079 639,735 666,667 3,209,985 379,457 3,589,442 750,000 67,811 817,811 1,358,054 731,260 800,000 3,707,125 461,860 4,168,985 2017 (min) 750,000 67,811 817,811 0 0 0 817,811 461,860 1,279,671 2017 (max) 750,000 67,811 817,811 1,950,000 1,050,000 1,200,000 5,017,811 461,860 5,479,671 2016 2017 750,000 53,903 803,903 1,425,695 767,682 800,000 3,797,280 459,243 4,256,523 750,000 95,165 845,165 1,358,054 731,260 800,000 3,734,479 459,882 4,194,361 2017 (min) 750,000 95,165 845,165 0 0 0 845,165 459,882 1,305,047 2017 (max) 750,000 95,165 845,165 1,950,000 1,050,000 1,200,000 5,045,165 459,882 5,505,047 2016 2017 750,000 36,151 786,151 1,425,695 767,682 800,000 3,779,528 457,533 4,237,061 750,000 47,588 797,588 1,358,054 731,260 800,000 3,686,902 458,721 4,145,623 2017 (min) 750,000 47,588 797,588 0 0 0 797,588 458,721 1,256,309 2017 (max) 750,000 47,588 797,588 1,950,000 1,050,000 1,200,000 4,997,588 458,721 5,456,309 2016 2017 750,000 44,622 794,622 1,425,695 767,682 800,000 3,787,999 456,400 4,244,399 125,000 25,218 150,218 189,741 102,168 106,667 548,794 179,972 728,766 2017 (min) 125,000 25,218 150,218 0 0 0 150,218 179,972 330,190 2017 (max) 125,000 25,218 150,218 260,000 140,000 160,000 710,218 179,972 890,190 2016 – – – – – – – – – 1 Payment amount. 2 Pursuant to DCGK, expected amount based on an average probability scenario (not the actual amount paid out). 3 Target amount pursuant to DCGK, based on a 30-percent increase in adjusted earnings per preferred share within the performance period of three years. LTI payout for 2017 occurs in 2020; LTI payout for 2016 occurs in 2019. 4 Pursuant to DCGK, service cost determined in accordance with IAS. 5 Pascal Houdayer left the company by mutual agreement on October 31, 2017. In connection with the termination of his contract, his entitlements from the Short Term Incentive 2017 (pro rata) were settled, as contractually agreed, through payment of 1,590,200 euros gross, and the entitlements accumulated in 2016 and 2017 (pro rata) from the Long Term Incentive were settled through payment of 1,264,640 euros gross in total. Furthermore, he received severance pay of 5,120,400 euros gross in October 2017 in recognition of his contractual entitlement to remuneration for the remaining term of his contract. In addition, he is bound by a post-contractual non-competition clause with a term of two years. This entitles him to compensation of 71,095 euros gross per month for the remain- ing period not already covered by the severance payment; other earnings shall be offset against this discretionary payment. 54 Corporate governance Henkel Annual Report 2017 Pursuant to DCGK, remuneration / benefits paid for the reporting year to members of the Management Board serving in 2017 24 Total remu- neration pursuant to DCGK (Total of 1 to 6) 1. Fixed salary 1 2. Other emolu- ments 1 Total (1 and 2) 3. Short- term variable cash remunera- tion 2 4. Long- term vari- able cash remunera- tion (share deferral) 2 5. Long-term incentive 3 2015 tranche (term 1/1/2015 – 12/31/2017) 2014 tranche (term 1/1/2014 – 12/31/2016) Total (1 to 5) 6. Service cost 4 2017 1,200,000 56,648 1,256,648 2,486,755 1,339,022 894,853 5,977,278 767,944 6,745,222 2016 1,050,000 119,576 1,169,576 2,046,007 1,101,696 249,410 4,566,689 664,043 5,230,732 2017 750,000 47,540 797,540 1,498,165 806,704 894,853 3,997,262 461,600 4,458,862 2016 750,000 45,208 795,208 1,511,755 814,022 249,410 3,370,395 458,996 3,829,391 2017 625,000 50,113 675,113 1,033,630 556,570 – 2,265,313 377,480 2,642,793 2016 625,000 90,504 715,504 1,192,629 642,185 – 2,550,318 379,457 2,929,775 2017 750,000 67,811 817,811 1,498,165 806,704 894,853 4,017,533 461,860 4,479,393 2016 750,000 53,903 803,903 1,563,755 842,022 249,410 3,459,090 459,243 3,918,333 2017 750,000 95,165 845,165 1,377,915 741,954 894,853 3,859,887 459,882 4,319,769 2016 750,000 36,151 786,151 1,459,755 786,022 249,410 3,281,338 457,533 3,738,871 2017 750,000 47,588 797,588 1,449,415 780,454 894,853 3,922,310 458,721 4,381,031 2016 750,000 44,622 794,622 1,563,755 842,022 249,410 3,449,809 456,400 3,906,209 2017 125,000 25,218 150,218 188,922 101,727 – 440,867 179,972 620,839 2016 – – – – – – – – – in euros Hans Van Bylen (Chairman) (since 5/1/2016) Member of the Management Board since 7/1/2005 Jan-Dirk Auris (Adhesive Technologies) Member of the Management Board since 1/1/2011 Pascal Houdayer 5 (Beauty Care) Member of the Management Board from 3/1/2016 to 10/31/2017 Carsten Knobel (Finance) Member of the Management Board since 7/1/2012 Kathrin Menges (Human Resources) Member of the Management Board since 10/1/2011 Bruno Piacenza (Laundry & Home Care) Member of the Management Board since 1/1/2011 Jens-Martin Schwärzler (Beauty Care) Member of the Management Board since 11/1/2017 1 Payment amount. 2 Pursuant to DCGK, based on the payment amount of the remuneration components granted for the relevant fiscal year; actual allocation occurs in the following year. 3 Pursuant to DCGK, based on the payment amount of those tranches for which the plan term of three years ended in the relevant fiscal year; actual allocation occurs in the following year. 4 Pursuant to DCGK, service cost determined in accordance with IAS. 5 Pascal Houdayer left the company by mutual agreement on October 31, 2017. In connection with the termination of his contract, his entitlements from the Short Term Incentive 2017 (pro rata) were settled, as contractually agreed, through payment of 1,590,200 euros gross, and the entitlements accumulated in 2016 and 2017 (pro rata) from the Long Term Incentive were settled through payment of 1,264,640 euros gross in total. Furthermore, he received severance pay of 5,120,400 euros gross in October 2017 in recognition of his contractual entitlement to remuneration for the remaining term of his contract. In addition, he is bound by a post-contractual non-competition clause with a term of two years. This entitles him to compensation of 71,095 euros gross per month for the remaining period not already covered by the severance payment; other earnings shall be offset against this discretionary payment. Henkel Annual Report 2017 Corporate governance 55 2. Remuneration of Henkel Management AG for assumption of personal liability, and reimbursement of expenses to same For assumption of personal liability and manage- ment responsibility, Henkel Management AG in its function as Personally Liable Partner receives an annual payment of 50,000 euros (= 5 percent of its capital stock) plus any value-added tax (VAT) due, said fee being payable irrespective of any profit or loss made. Henkel Management AG may also claim reimburse- ment from or payment by the corporation of all expenses incurred in connection with the manage- ment of the corporation’s business, including the remuneration and pensions paid to its corporate bodies. 3. Remuneration of members of the Super- visory Board and of the Shareholders’ Committee of Henkel AG & Co. KGaA Regulation, structure and amounts The remuneration for the Supervisory Board and the Shareholders’ Committee is determined by the Annual General Meeting; the corresponding provi- sions are contained in Articles 17 and 33 of the Articles of Association. Remuneration is of a purely fixed nature commensurate with the responsibility and scope of duties of the Chair, Vice Chair and (sub)committee members respectively. Each member of the Supervisory Board and of the Shareholders’ Committee receives a fixed fee of 70,000 euros and 100,000 euros per year respec- tively. The Chairs of the Supervisory Board and the Shareholders’ Committee each receive double this amount, and the Vice Chair in each case one and a half times the aforementioned amount. Members of the Supervisory Board who are also members of one or more committees each receive additional remuneration of 35,000 euros; if they chair one or more committees, they receive 70,000 euros. Activity in the Nominations Commit- tee is not remunerated separately. Members of the Shareholders’ Committee who are also members of one or more subcommittees of the Shareholders’ Committee each receive additional remuneration of 100,000 euros; if they chair one or more subcommittees, they receive 200,000 euros. The higher remuneration allocated to the members of the Shareholders’ Committee as compared to the Supervisory Board takes into account that, under the Articles of Association, the Shareholders’ Committee participates in the management of the corporation. Miscellaneous The members of the Supervisory Board or a committee receive an attendance fee amounting to 1,000 euros for each meeting in which they participate. If several meetings take place on one day, the attendance fee is only paid once. In addition, the members of the Supervisory Board and of the Shareholders’ Commit- tee are reimbursed expenses incurred in connection with their positions. The members of the Supervisory Board are also reimbursed the value-added tax (VAT) payable on their total remunerations and reimbursed expenses. The corporation maintains directors and officers insurance for directors and officers of the Henkel Group. For members of the Supervisory Board and Shareholders’ Committee there is a deductible amounting to 10 percent per loss event, subject to a maximum for the fiscal year of one and a half times their annual fixed remuneration. The Chairs of the Supervisory Board and of the Share- holders’ Committee are provided with an office and secretarial support to enable them to perform these duties. The company does not grant any loans or advances to members of the Supervisory Board or the Shareholders’ Committee. Remuneration of members of the Supervisory Board and of the Shareholders’ Committee for fiscal 2017 Total remuneration paid to the members of the Supervisory Board for the year under review (fixed fee, attendance fee, remuneration for committee activity) amounted to 1,565,000 euros plus VAT (pre- vious year: 1,572,896 euros plus VAT). Of this amount, fixed fees accounted for 1,225,000 euros, attendance fees for 71,000 euros, and remuneration for commit- tee activity (including associated attendance fees) for 269,000 euros. Total remuneration paid to the members of the Shareholders’ Committee for the year under review (fixed fee and remuneration for subcommittee activ- ity) amounted to 2,215,754 euros (previous year: 2,350,000 euros). Of this amount, fixed fees were 1,082,877 euros and remuneration for subcommittee activity 1,132,877 euros. 56 Corporate governance Henkel Annual Report 2017 In the year under review, no compensation or bene- fits were paid or granted for personally performed services, including in particular advisory or interme- diation services. The remuneration of the individual members of the Supervisory Board and of the Shareholders’ Commit- tee, broken down according to the above-mentioned components, is presented in the tables on the follow- ing pages. Supervisory Board remuneration 25 in euros Dr. Simone Bagel-Trah 3, Chair Winfried Zander 3, Vice Chair Jutta Bernicke Dr. Kaspar von Braun Boris Canessa (until 4/11/2016) Johann-Christoph Frey (since 4/11/2016) Ferdinand Groos (until 4/11/2016) Béatrice Guillaume-Grabisch (until 3/13/2016) Peter Hausmann 3 Birgit Helten-Kindlein 3 Benedikt-Richard Freiherr von Herman (since 4/11/2016) Timotheus Höttges (since 4/11/2016) Prof. Dr. Michael Kaschke 3 Angelika Keller (since 1/1/2017) Barbara Kux Mayc Nienhaus (until 12/31/2016) Andrea Pichottka Dr. Martina Seiler Prof. Dr. Theo Siegert 3 Edgar Topsch Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Components of total remuneration Fixed remuneration Attendance fee Fee for commit- tee activity 1 Total remuneration 2 140,000 140,000 105,000 105,000 70,000 70,000 70,000 70,000 – 19,508 70,000 50,492 – 19,508 – 17,404 70,000 70,000 70,000 70,000 70,000 50,492 70,000 50,492 70,000 70,000 70,000 – 70,000 70,000 – 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 4,000 5,000 4,000 5,000 5,000 5,000 5,000 6,000 – 2,000 5,000 4,000 – 2,000 – – 4,000 5,000 3,000 5,000 5,000 4,000 4,000 3,000 4,000 4,000 5,000 – 5,000 6,000 – 6,000 4,000 6,000 5,000 6,000 4,000 5,000 5,000 6,000 1,225,000 1,222,896 71,000 85,000 39,000 39,000 39,000 39,000 – – – – – – – – – – – – 39,000 37,000 39,000 39,000 – – – – 39,000 37,000 – – – – – – – – – – 183,000 184,000 148,000 149,000 75,000 75,000 75,000 76,000 – 21,508 75,000 54,492 – 21,508 – 17,404 113,000 112,000 112,000 114,000 75,000 54,492 74,000 53,492 113,000 111,000 75,000 – 75,000 76,000 – 76,000 74,000 76,000 75,000 76,000 74,000 74,000 – – 269,000 265,000 148,000 149,000 75,000 76,000 1,565,000 1,572,896 1 Remuneration for service on the Audit Committee, including attendance fee; there is no separate remuneration payable for service on the Nominations Committee. 2 Figures do not include VAT. 3 Member of the Audit Committee. Audit Committee Chair: Prof. Dr. Theo Siegert. Henkel Annual Report 2017 Corporate governance 57 Shareholders’ Committee remuneration 26 in euros Dr. Simone Bagel-Trah, Chair (Chair Human Resources Subcommittee) Dr. Christoph Henkel, Vice Chair (Chair Finance Subcommittee) Prof. Dr. Paul Achleitner (Member Finance Subcommittee) Boris Canessa (Member HR Subcommittee) (from 4/11/2016 to 4/30/2017) Johann-Christoph Frey (Member HR Subcommittee) (until 4/11/2016) Stefan Hamelmann (Vice Chair Finance Subcommittee) Prof. Dr. Ulrich Lehner (Member Finance Subcommittee) Dr. Dr. Norbert Reithofer (Member Finance Subcommittee) Konstantin von Unger (Vice Chair HR Subcommittee) Jean-François van Boxmeer (Member HR Subcommittee) Werner Wenning (Member HR Subcommittee) Total 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Components of total remuneration Fixed remuneration Fee for subcommittee activity Total remuneration 200,000 200,000 150,000 150,000 100,000 100,000 32,877 72,131 – 27,869 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 200,000 200,000 200,000 200,000 100,000 100,000 32,877 72,131 – 27,869 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 400,000 400,000 350,000 350,000 200,000 200,000 65,754 144,262 – 55,738 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 1,082,877 1,150,000 1,132,877 1,200,000 2,215,754 2,350,000 4. Remuneration of the members of the Supervisory Board of Henkel Management AG According to Article 14 of the Articles of Association of Henkel Management AG, the members of the Supervisory Board of Henkel Management AG are each entitled to receive annual remuneration of 10,000 euros. However, those members of said Supervisory Board who are also and simultaneously members of the Supervisory Board or the Shareholders’ Committee of Henkel AG & Co. KGaA do not receive this remuneration. As the Supervisory Board of Henkel Management AG is only comprised of members who also belong to the Shareholders’ Committee, no remuneration was paid in respect of this Supervisory Board in the year under review. 58 Combined management report Henkel Annual Report 2017 Combined management report 59 Fundamental principles of the Group 59 Operational activities 59 Overview 59 Organization and business units 60 Henkel 2020+: our ambition and strategic priorities 61 Our ambition 62 Strategic priorities in summary 63 Sustainability strategy 63 Management system and performance indicators 64 Cost of capital 64 Disclosures concerning acquisitions, corporate governance declaration, remuneration report 64 Separate non-financial report 72 Results of operations of the business units 72 Adhesive Technologies 74 Beauty Care 76 Laundry & Home Care 78 Net assets and financial position 78 Acquisitions and divestments 78 Capital expenditures 79 Net assets 80 Financial position 80 Financing und capital management 81 Key financial ratios 82 Employees 84 Procurement 85 Production 87 Research and development 90 Marketing and distribution 65 Economic report 65 Macroeconomic development 66 Development by sector 66 Review of overall business performance 67 Results of operations of the Group 67 Sales 68 Operating profit 69 Expense items 69 Other operating income and expenses 69 Financial result 69 Net income and earnings per share (EPS) 70 Dividend 70 Return on capital employed (ROCE) 70 Economic Value Added (EVA®) 71 Comparison between actual business performance and guidance 92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report 96 Risks and opportunities 96 Risk management system 98 Major risk categories 103 Major opportunity categories 103 Risks and opportunities in summary 104 Forecast 104 Macroeconomic development 104 Development by sector 105 Outlook for the Henkel Group in 2018 Henkel Annual Report 2017 Combined management report 59 Fundamental principles of the Group Operational activities Overview Henkel was founded in 1876. Therefore, the year under review marks the 141st in our corporate his- tory. At the end of 2017, Henkel’s workforce world- wide numbered 53,700. We occupy globally leading market positions in our consumer and industrial businesses. its tasks within the legal scope afforded to it as part of the Henkel Group, with the affiliated companies otherwise operating as legally independent entities. Operational management and control is the respon- sibility of the Management Board of Henkel Manage- ment AG in its function as sole Personally Liable Partner. The Management Board is supported in this by the central, corporate functions. 1876 Year of foundation. Our purpose is to create sustainable value – for our customers and consumers, for our people and for our shareholders, as well as for the wider society and communities in which we operate. Organization and business units Henkel AG & Co. KGaA is operationally active as well as being the parent company of the Henkel Group. As such it is responsible for defining and pursuing Henkel’s corporate objectives and also for the man- agement, control and monitoring of Group-wide activities, including risk management and the allo- cation of resources. Henkel AG & Co. KGaA performs Henkel is organized into three business units: Adhe- sive Technologies, Beauty Care and Laundry & Home Care. Henkel’s Adhesive Technologies business unit leads the global market in the field of adhesives. In our Beauty Care and Laundry & Home Care consumer businesses, we also hold top positions in numerous markets and categories. Adhesive Technologies leads the global market with high-impact solutions. The business unit offers a broad portfolio of adhesives, sealants and functional coatings through both its Industry and its Consum- ers, Craftsmen and Building businesses. Henkel around the world: Regional Centers 27 t r o p e r t n e m e g a n a m d e n i b m o C Rocky Hill, Connecticut, USA Regional Center Düsseldorf, Germany Global Headquarters Vienna, Austria Regional Center Shanghai, China Regional Center Stamford, Connecticut, USA Regional Center Mexico City, Mexico Regional Center São Paulo, Brazil Regional Center Dubai, United Arab Emirates Regional Center 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 60 Combined management report Henkel Annual Report 2017 Our three business units are managed on the basis of globally responsible strategic business units. These are supported by the central functions of Henkel AG & Co. KGaA, our shared services, and our Global Supply Chain organization in order to ensure optimum utilization of corporate network synergies. Implementation of the strategies at the country and regional level is the responsibility of the national affiliated companies whose operations are supported and coordinated by regional centers. The executive bodies of these national affiliates manage their busi- nesses in line with the relevant statutory regulations, supplemented by their own articles of association, internal procedural rules and the principles incorpo- rated in our globally applicable management stan- dards, codes and guidelines. Henkel 2020+: Our ambition and strategic priorities Henkel has defined four strategic priorities to con- tinue driving sustainable profitable growth through to 2020 and beyond: drive growth, accelerate digitali- zation, increase agility and fund growth. Our bal- anced and broadly diversified port folio with strong brands, innovative technologies and leading posi- tions in attractive markets and categories provides a strong foundation. Our passionate global team is united in a strong corporate culture with shared values. Building on its strong foundation, Henkel is continu- ing its path of profitable growth. At the end of 2016, we presented the ambition and strategic priorities that will drive the company through to 2020 and beyond. The Industry business encompasses four areas. In the Packaging and Consumer Goods Adhesives busi- ness area, we work with major brand manufacturers and international customers to develop innovative and sustainable solutions for food packaging and consumer goods. In the Transport and Metal busi- ness area, we provide our customers in the automo- tive, aircraft and aerospace, and metal processing industries with innovative system solutions, a com- prehensive technology portfolio, and specialized technical services. In the General Industry business area, we offer a comprehensive portfolio of products for the manufacture and maintenance of durable goods. Our customers range from household appli- ance manufacturers through to operators of large- scale industrial plants, and service specialists oper- ating in all branches of industry. Our Electronics business area offers customers a specialized portfolio of innovative high-technology adhesives and materials for the manufacture of microchips, electronic assem- blies and thermal management systems. Our Adhesives for Consumers, Craftsmen and Build- ing business area markets an extensive range of brand-name products for private, trade and construc- tion users. Worldwide, the Beauty Care business unit is active in the Branded Consumer Goods business area with Hair Cosmetics, Body Care, Skin Care and Oral Care, as well as in the professional Hair Salon business. In both business areas, we hold top positions in numerous markets and categories. Both our Branded Consumer Goods and Hair Salon businesses offer focused brand portfolios featuring customer-rele- vant innovations that create added value for our cus- tomers and consumers. Our products are sold both in brick-and-mortar stores and online. The Laundry & Home Care business unit occupies leading market positions in both the Laundry and Home Care business areas. Our strong brands and consumer-relevant innovations play a key role in the everyday lives of our consumers. Our product portfolio ranges from heavy-duty detergents, specialty deter- gents and laundry additives to dishwashing products, hard surface and WC cleaners, air fresheners and insect control products – all sold mainly in brick- and-mortar stores, but also via TV-based and online retailing. Henkel Annual Report 2017 Combined management report 61 Drive Growth Accelerate Digitalization Financial ambition 2020 28 Organic growth Adjusted EPS growth Adjusted EBIT margin Free cash flow 1 Compound annual growth rate. 2 – 4 % (average 2017–2020) 7 – 9 % (CAGR 1 2016 – 2020, per preferred share) Continued improvement in adjusted EBIT margin Continued focus on free cash flow expansion Alongside organic growth, acquisitions will continue to be an integral part of our strategy. Our assessment of potential acquisitions is based on whether the targets are available, fit Henkel’s strategy, and are financially attractive. The focus in the Adhesive Technologies business unit is on expanding technology leadership, whereas in the Beauty Care and Laundry & Home Care business units, we are striving to strengthen our categories. Fund Growth Increase Agility Our ambition In 2016, we defined our ambition in a very volatile market environment characterized by increasing globalization, accelerating digitalization, rapidly changing markets, and an increasing relevance of resource scarcity and social responsibility. We want to become more customer-focused and make the company even more innovative, agile and digital, in both our internal processes and our customer-facing activities. In addition, we are further promoting sustainability in all our business activities. Henkel has defined the following financial ambition for the period from 2016 until 2020: • We are aiming to achieve organic sales growth of 2 to 4 percent on average over the four years until 2020. • For adjusted earnings per preferred share, we are targeting a compound annual growth rate (CAGR) of 7 to 9 percent between 2016 and 2020. This ambition for EPS growth includes the impact of currency developments, and minor and mid-sized acquisitions. It excludes major acquisitions as well as share buy-backs. • We are aiming for continued improvement in adjusted EBIT margin. In addition, we will main- tain our focus on free cash flow expansion. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 62 Combined management report Henkel Annual Report 2017 Strategic priorities in summary Fund growth Drive growth Driving growth in mature and emerging markets is a key strategic priority for Henkel. In order to achieve this, we focus on targeted initiatives to create superior customer and consumer engagement, strengthen our leading brands and technologies, develop exciting innovations and services, and capture new sources of growth. Accelerate digitalization Accelerating digitalization helps us to successfully grow our business, strengthen the relationships with our customers and consumers, optimize our pro- cesses and transform the entire company. By 2020, we will implement a range of initiatives to drive our digital business, leverage Industry 4.0, and eTrans- form the organization. Increase agility In a highly volatile and dynamic business environ- ment, increasing the agility of the organization is a critical success factor for Henkel. This requires ener- gized and empowered teams, fastest time-to-market as well as smart and simplified processes. In order to fund growth, we are implementing new approaches to optimize resource allocation, focus on net revenue management, further increase efficiency in our structures, and continue to expand our Global Supply Chain organization. Together, these initia- tives will contribute to further improving profitabil- ity and enable us to fund our growth ambitions for 2020 and beyond. We started implementing these priorities and initia- tives in fiscal 2017, with high dynamism and huge commitment on the part of our employees. To drive growth, we have agreed joint long-term business development plans with strategically important cus- tomers. We have further sharpened the focus of new products and new services on the needs of consum- ers. Aside from organic growth, a number of acquisi- tions have additionally strengthened our business (see table below). Integration of our acquired busi- nesses is proceeding successfully. Our efforts to build a digital organization are also making substan- tial progress and driving the digital transformation of the company. To foster our agility, we have simpli- fied processes and structures in all our business units. We have quickly launched the Fund Growth initiatives. Key milestones on the path to global roll- out have been reached. Acquisitions signed and closed in fiscal 2017 Business Key brands Key countries Contract signed on Completion on Darex Packaging Technologies, high-performance sealants and coatings Sonderhoff Holding GmbH, industrial gasketing solutions – – Global 3/2/2017 7/3/2017 Germany 5/16/2017 7/3/2017 ~ 60 Nattura Laboratorios, S.A. de C.V., hair salon business Pravana, Tec Italy Mexico, USA 3/8/2017 9/1/2017 ~ 120 Zotos International Inc., hair salon business 1 Proforma sales 2017. Joico, Zotos USA 10/26/2017 12/28/2017 ~ 210 Annual sales in million euros 1 ~ 260 29 Purchase price in million euros For further information, see pages 938 119 392 403 78, 85, 116–117 78, 85, 116–117 78, 86, 89, 116–117 78, 86, 116–117 Henkel Annual Report 2017 Combined management report 63 Sustainability strategy Sustainability as one of our corporate values Our commitment to leadership in sustainability is anchored in our corporate values. We want to create more value – for our customers and consumers, for the communities we operate in, and for our company – while, at the same time, reducing our environmental footprint. We aim to pioneer new solutions for sustainable development while continuing to shape our business responsibly and increasing our eco- nomic success. Our sustainability strategy provides a clear framework for this aim and reflects the high expectations of our stakeholders. Our focal areas We are concentrating our activities on six focal areas that reflect the key challenges of sustainable devel- opment as they relate to our operations. Three of them describe how we want to deliver more value – for our customers and consumers, our shareholders and our company – for example, by enhancing occu- pational health and safety, and encouraging social progress. The three other focal areas describe the ways in which we want to reduce our environmental footprint, for instance through reduced water and energy use and less waste. Key drivers for the coming years We are convinced that our focus on sustainability is more important than ever before, and that it supports our growth, improves our cost efficiency, and reduces risks. We already have a strong foundation on which to build, and can demonstrate a successful track record. To reflect the growing importance of sustain- ability for our stakeholders and our long-term eco- nomic success, we defined three key drivers in 2016 that will help us to advance sustainability at Henkel over the coming years: • Strengthen foundation • Boost engagement • Maximize impact More details and background reading on the subject of sustainability can be found in our Sustainability Report on the internet: www.henkel.com/sustainabilityreport Management system and performance indicators Henkel plans to continue generating sustainable profitable growth through to 2020 and beyond. To this end, we have defined four strategic priorities – drive growth, accelerate digitalization, increase agility and fund growth – as described on pages 60 to 62. To enable efficient management of the Group, we align our actions to these strategic priorities and have translated them into strategy plans for our central functions, the three business units Adhesive Technologies, Beauty Care and Laundry & Home Care, and their respective business areas. Our management system and key performance indi- cators are derived from our ambition to continue generating sustainable profitable growth. The key performance indicators are organic sales growth, developments in adjusted return on sales, and growth in adjusted earnings per preferred share. Over the four years until 2020, Henkel is aiming to achieve organic sales growth of 2 to 4 percent on average. For adjusted earnings per preferred share, Henkel is targeting a compound annual growth rate (CAGR) of 7 to 9 percent. We are also aiming for a con- tinued improvement of the adjusted EBIT margin. The key performance indicators are represented in both the year and the medium-term plans. A regular comparison of these plans with current develop- ments and expected figures enables focused man- agement of the company based on the described performance indicators. Moreover, we report further key performance indica- tors, such as net working capital as a percentage of sales, return on capital employed (ROCE), and free cash flow, which we are aiming to further expand as described in our financial ambition for 2020. www.henkel.com/ sustainabilityreport 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 64 Combined management report Henkel Annual Report 2017 Cost of capital The cost of capital is calculated as a weighted average of the cost of equity and debt capital (WACC). We regularly review our cost of capital in order to reflect changing market conditions. In addition, we apply different WACC rates depending on the busi- ness unit involved. These are based on business unit-specific beta factors determined from a peer group benchmark. The following two tables indicate the WACC rates before and after tax for the Henkel Group and each business unit. WACC before tax by business unit in percent Adhesive Technologies Beauty Care Laundry & Home Care Henkel Group WACC after tax by business unit in percent Adhesive Technologies Beauty Care Laundry & Home Care Henkel Group 2017 10.25 9.00 9.00 7.75 2017 7.00 6.25 6.25 5.50 30 2018 10.50 9.00 9.00 8.00 31 2018 7.25 6.25 6.25 5.50 Disclosures concerning acquisitions, corporate governance declaration, remuneration report With regard to the disclosures and explanations • pursuant to Sections 289a (1) and 315a (1) German Commercial Code [HGB] – Disclosures concerning acquisitions – please refer to pages 36 to 38 • pursuant to Sections 289f and 315d HGB – Corporate governance declaration – please refer to pages 39 to 46 and • pursuant to Sections 289a (2) and 315a (2) HGB – Remuneration report – please refer to pages 46 to 57 which duly constitute integral parts of the combined management report. Pursuant to Section 317 (2) sentence 6 HGB, any audit of the disclosures pursuant to Sections 289f and 315d HGB – Corporate governance declaration – is limited to the auditor ensuring the relevant information has actually been disclosed. Separate non-financial report With regard to the explanations pursuant to Sections 289b and 315b German Commercial Code [HGB], please refer to our Sustainability Report 2017. It constitutes the separate, combined non-financial group report for the Henkel Group and Henkel AG & Co. KGaA for fiscal 2017 as required in Sections 315b and 315c HGB in conjunction with Sections 289c to 289e HGB, and is made publicly available through publication on the website. www.henkel.com/sustainabilityreport 7.75 % Group WACC before tax in fiscal 2017. Henkel Annual Report 2017 Combined management report 65 59 Fundamental principles 92 Henkel AG & Co. KGaA of the Group 65 Economic report (condensed version according to the German Commercial Code [HGB]) 096 Risks and opportunities report 104 Forecast Economic report Macroeconomic development The general economic conditions described in this section are based on data published by IHS Markit. Overview: Slight improvement in the global economy under persistently difficult underlying conditions Global economic growth was moderate in 2017. Gross domestic product increased by approximately 3 percent worldwide, representing a rise in growth rate versus prior year. The mature markets grew by around 2 percent, while the emerging markets achieved an increase of approximately 5 percent. Economic growth in both North America and West- ern Europe was around 2 percent for the year as a whole. The Japanese economy also expanded by approximately 2 percent. Economic growth in Asia (excluding Japan) was approximately 6 percent, with China coming in slightly higher. Eastern Europe posted growth of approximately 4 percent, helped by a slight improvement in the economic situation in Russia. The Africa / Middle East region recorded an increase of approximately 2 percent. After shrinking in 2016, economic growth in Latin America recovered with growth of approximately 1.5 percent in the reporting period. Unemployment: Global level unchanged year on year Global unemployment remained close to the level of the previous year at around 7.5 percent. Year on year, the unemployment rates in both North America and Western Europe were lower at approximately 4.5 per- cent and approximately 8.5 percent respectively. By contrast, the unemployment rate in Latin America increased to approximately 9.5 percent. Compared to prior year, the unemployment rate declined slightly to 6.5 percent in Eastern Europe, while remaining almost unchanged in Africa / Middle East and Asia (excluding Japan). Inflation: Moderate rise in global price levels Global inflation was approximately 3 percent and thus lower year on year. In the mature markets, inflation was around 2 percent and therefore up compared to prior year. Prices increased in Western Europe, North America and Japan. By contrast, the inflation rate decreased significantly in the emerging markets compared to prior year, to approximately 5 percent. The overall trend differed from one region to the next. Year on year, inflation decreased signifi- cantly in Latin America. Inflation rates remained virtually unchanged year on year in Asia (excluding Japan) and in Eastern Europe. The inflation rate rose to approximately 6 percent in Africa / Middle East. Direct materials: Moderately higher than prior-year level As expected, prices for direct materials (raw materials, packaging, and purchased goods and services) rose moderately in 2017 compared to the level of the previous year. This development was driven by higher prices for relevant input materials, particularly crude oil. Currencies: High volatility in emerging markets Currencies in the emerging markets of relevance to Henkel were, on average, relatively volatile over the year. The Turkish lira recorded the most significant devaluation, while the Russian ruble gained substan- tially in value. The US dollar remained stable over the first three months of the year before depreciating significantly as the year progressed. It closed at 1.20 US dollars to the euro at year-end. Averaged out over the year as a whole, the US dollar depreciated slightly versus the euro. 66 Combined management report Henkel Annual Report 2017 Changes in the exchange rates of the currencies of relevance to Henkel are indicated in the following table: Review of overall business performance Average rates of exchange versus the euro Chinese yuan Mexican peso Polish zloty Russian ruble Turkish lira US dollar +3.1 % organic sales growth. 2016 7.36 20.67 4.36 74.07 3.34 1.11 Source: ECB daily foreign exchange reference rates. 32 2017 7.63 21.33 4.26 65.95 4.12 1.13 2017 proved to be a strong year for Henkel. In a challenging economic environment, we continued the success of the previous year. Sales topped the 20 billion euro mark for the first time ever. Organically we achieved a sales increase of 3.1 percent. Our businesses in the emerging markets showed very strong organic growth of 5.3 percent. Organic sales growth in the mature markets was positive at 1.5 percent. Development by sector Moderate rise in global consumption Private consumer spending grew moderately at a rate of approximately 3 percent across all sectors. Consumer spending in mature markets increased by around 2 percent year on year. Consumers in North America increased their spending by around 3 percent. In Western Europe, consumer spending grew by approximately 2 percent compared to the previous year. Consumers in emerging markets spent around 4.5 percent more. Industrial production above prior-year level The industrial production index (IPX) was approxi- mately 3 percent and thus above the prior-year level worldwide. The improvement was mainly attribut- able to the mature markets, which registered growth of approximately 2.5 percent in 2017. In the emerging markets growth was approximately 4 percent. Adjusted 1 gross margin decreased by 1.3 percentage points to 47.1 percent. Savings from cost reduction measures and efficiency improvements accompa- nied by selective price increasess only partially offset the negative impact of higher prices for direct mate- rials (raw materials, packaging, and purchased goods and services) and acquisition effects. As a result of our strict focus on cost management, the rapid and disciplined implementation of our “Fund growth” initiatives, and the adjustment of our structures to our markets and customers, we were able to further improve our profitability once again versus prior year. Adjusted return on sales increased by 0.4 percentage points in 2017, reaching a new all- time high of 17.3 percent (2016: 16.9 percent). Adjusted earnings per preferred share grew to 5.85 euros, a significant increase of 9.1 percent over the 2016 figure of 5.36 euros. Net working capital as a percentage of sales increased by 1.3 percentage points to 4.8 percent. We generated free cash flow of 1,701 million euros. Following our acquisitions in 2017, we closed the year with a net financial position of –3,225 million euros (2016: –2,301 million euros). 1 Adjusted for one-time charges / gains and restructuring expenses. Henkel Annual Report 2017 Combined management report 67 Results of operations of the Group Sales EBIT EPS Dividend + 3.1 % organic sales growth 17.3 % 5.85 euros 1.79 euros adjusted 1 return on sales (EBIT): up 0.4 percentage points adjusted 1 earnings per preferred share (EPS): up 9.1 percent dividend per preferred share 2 Sales Sales in fiscal 2017 increased nominally by 7.0 per- cent to their highest-ever level of 20,029 million euros. Currency movements had a negative effect on sales of 2.0 percent. Adjusted for foreign exchange effects, sales grew by 9.0 percent. Acquisitions / divestments accounted for 5.9 percent of the increase in sales. Organic sales growth, i.e. adjusted for foreign exchange and acquisitions / divestments, was strong at 3.1 percent. This was mainly driven by volume. 33 2017 7.0 – 2.0 9.0 5.9 3.1 0.2 2.9 34 Sales development 1 in percent Change versus previous year Foreign exchange Adjusted for foreign exchange Acquisitions / divestments Organic of which price of which volume 1 Calculated on the basis of units of 1,000 euros. Sales in million euros 2013 16,355 2014 16,428 2015 18,089 2016 18,714 2017 20,029 0 5,000 10,000 15,000 20,000 1 Adjusted for one-time charges / gains and restructuring expenses. 2 Proposal to shareholders for the Annual General Meeting on April 9, 2018. All business units were able to grow sales organi- cally. Organic sales growth was 5.0 percent in the Adhesive Technologies business unit, 0.5 percent in Beauty Care, and 2.0 percent in Laundry & Home Care. Price and volume effects 35 in percent Adhesive Technologies Beauty Care Laundry & Home Care Henkel Group Organic sales growth of which price of which volume 5.0 0.5 2.0 3.1 0.4 0.1 0.1 0.2 4.6 0.4 1.9 2.9 In a market environment that continues to be highly competitive, sales in the Western Europe region, at 6,033 million euros, were slightly up year on year. Organic sales growth was positive. Good performance in Germany was one of the factors that helped to off- set lower sales in France. The share of sales from the region decreased to 30 percent. We were able to increase sales in Eastern Europe by 6.8 percent to 2,897 million euros. Organically, sales grew by 6.0 percent. This very strong organic sales growth was primarily driven by the performance of our businesses in Turkey. At 14 percent, the share of sales from the region was lower year on year. Our sales in the Africa / Middle East region decreased nominally by 5.5 percent to 1,302 million euros. Despite the continuing political and social unrest in some countries, we were able to record organic sales growth of 1.7 percent. At 6 percent, the share of sales from the region was slightly down year on year. Sales in the North America region increased by 22.9 percent to 5,162 million euros. The acquisition 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 68 Combined management report Henkel Annual Report 2017 Key financials by region 1 in million euros Sales 2 2017 Sales 2 2016 Western Europe Eastern Europe Africa / Middle East North America Latin America Asia- Pacific Total Regions Corporate Henkel Group 6,033 5,999 2,897 2,713 1,302 1,378 5,162 4,202 1,142 1,055 3,371 3,246 19,906 18,593 123 121 20,029 18,714 36 Change from previous year Adjusted for foreign exchange Organic Proportion of Group sales 2017 Proportion of Group sales 2016 0.6 % 1.3 % 0.5 % 30 % 32 % Operating profit (EBIT) 2017 Operating profit (EBIT) 2016 1,463 1,335 Change from previous year Adjusted for foreign exchange Return on sales (EBIT) 2017 Return on sales (EBIT) 2016 9.6 % 9.8 % 24.3 % 22.3 % 1 Calculated on the basis of units of 1,000 euros. 2 By location of company. 6.8 % 6.3 % 6.0 % 14 % 15 % 280 328 – 14.8 % – 18.3 % 9.7 % 12.1 % – 5.5 % 7.5 % 1.7 % 6 % 7 % 58 111 – 47.7 % – 48.0 % 4.5 % 8.1 % 22.9 % 24.6 % 3.0 % 26 % 22 % 731 505 44.7 % 47.7 % 14.2 % 12.0 % 8.2 % 9.5 % 4.4 % 6 % 6 % 112 126 – 10.8 % – 8.2 % 9.8 % 11.9 % 3.8 % 6.1 % 5.9 % 17 % 17 % 7.1 % 9.1 % 3.1 % 99 % 99 % – – – 1 % 1 % 537 485 3,181 2,890 – 126 – 115 10.8 % 13.3 % 15.9 % 14.9 % 10.1 % 10.8 % 16.0 % 15.5 % – – – – 7.0 % 9.0 % 3.1 % 100 % 100 % 3,055 2,775 10.1 % 10.4 % 15.3 % 14.8 % of The Sun Products Corporation contributed sub- stantially to the increase in nominal sales. Organi- cally, the region posted sales growth of 3.0 percent. The share of sales from the region increased to 26 percent. Operating profit The following explanations relate to results adjusted for one-time charges / gains and restructuring expenses so as to present operational performance before exceptional items. Our sales in the Latin America region rose nominally by 8.2 percent to 1,142 million euros. Organically, we increased sales by 4.4 percent. The very strong growth of our businesses in Mexico made an especially important contribution to this performance. The share of sales from the region remained unchanged at 6 percent. Sales in the Asia-Pacific region increased year on year by 3.8 percent to 3,371 million euros. Organic sales growth in the region was 5.9 percent. The share of sales from the Asia-Pacific region remained flat at 17 percent. Sales in the emerging markets of Eastern Europe, Africa / Middle East, Latin America and Asia (exclud- ing Japan) were higher year on year at 8,130 million euros. Organically, sales grew by 5.3 percent. Thus the emerging markets again made an above-average contribution to organic sales growth. The share of sales from emerging markets was 40 percent. This ratio was slightly lower year on year due to acquisi- tions and foreign exchange effects. Adjusted operating profit (EBIT) in million euros EBIT (as reported) One-time gains One-time charges Restructuring expenses Adjusted EBIT 2016 2,775 – 1 121 277 3,172 2017 3,055 – 21 182 245 3,461 37 +/– 10.1 % 9.1 % In order to adapt our structures to our markets and customers, we spent 245 million euros on restructur- ing (previous year: 277 million euros). A significant portion of this amount is attributable to the optimi- zation of our sales and distribution structures and the integration of our acquisitions. Please refer to page 167 for more details of our restructuring expenses and an explanation of the one-time charges and gains. We were able to increase adjusted operating profit (adjusted EBIT) to 3,461 million euros, a rise of 9.1 percent on the prior-year figure of 3,172 million euros. Henkel Annual Report 2017 Combined management report 69 17.3 % adjusted return on sales, up 0.4 percentage points. All three business units contributed to this positive performance. We improved adjusted return on sales (adjusted EBIT margin) for the Group by 0.4 percent- age points to 17.3 percent. Adjusted return on sales in the Adhesive Technolo- gies business unit showed an increase of 0.3 percent- age points, reaching a new all-time high of 18.5 per- cent. The Beauty Care business unit was also again able to raise its adjusted return on sales, achieving a figure of 17.2 percent for the first time (previous year: 16.9 percent). The Laundry & Home Care business unit increased adjusted return on sales by 0.3 per- centage points to a new all-time high of 17.6 percent. In all business units, we benefited from our success- ful innovations together with ongoing measures to reduce costs and improve efficiency. Expense items The following explanations relate to our operating expenses adjusted for one-time charges / gains and restructuring expenses. The reconciliation statement and the allocation of the restructuring expenses between the various expense items of the consoli- dated statement of income can be found on page 167. The cost of sales increased by 9.7 percent to 10,598 mil- lion euros. Gross profit increased by 4.2 percent to 9,431 million euros. Adjusted gross margin decreased by 1.3 percentage points to 47.1 percent. Savings from cost reduction measures and efficiency improvements accompanied by selective price increases only partially offset the negative impact of higher prices for direct materials (raw materials, packaging, and purchased goods and services) and acquisition effects. At 4,665 million euros, marketing, selling and distri- bution expenses were above the prior-year figure of 4,543 million euros. Compared to fiscal 2016, the ratio to sales decreased to 23.3 percent. This reduc- tion is partially attributable to the lower ratio of mar- keting, selling and distribution expenses to sales of the business added as a result of the acquisition of The Sun Products Corporation. We spent a total of 469 million euros for research and development. The ratio to sales, at 2.3 percent, was slightly lower year on year. At 870 million euros, administrative expenses were virtually unchanged year on year (2016: 868 million euros). At 4.3 percent, administra- tive expenses as a percentage of sales were slightly lower year on year. Other operating income and expenses At 34 million euros, the balance of adjusted other operating income and expenses increased year on year (2016: –6 million euros). The rise was attribut- able to numerous individual transactions relating to operations. Financial result Funding the acquisitions closed in 2016 and 2017 caused the financial result to drop from – 33 million euros in 2016 to – 51 million euros in the reporting year. Net income and earnings per share (EPS) Income before tax increased by 262 million euros to 3,004 million euros. Taxes on income amounted to 463 million euros. The tax rate of 15.4 percent was substantially lower year on year (2016: 23.7 percent). The tax burden eased in the reporting year, mainly because of the remeasurement of deferred taxes resulting from the tax reform that was passed in the Reconciliation from sales to adjusted operating profit 1 in million euros Sales Cost of sales Gross profit Marketing, selling and distribution expenses Research and development expenses Administrative expenses Other operating income / expenses Adjusted operating profit (EBIT) 2016 18,714 – 9,665 9,049 – 4,543 – 460 – 868 – 6 3,172 % 100.0 – 51.6 48.4 – 24.4 – 2.5 – 4.6 0.0 16.9 2017 20,029 – 10,598 9,431 – 4,665 – 469 – 870 34 3,461 % 100.0 – 52.9 47.1 – 23.3 – 2.3 – 4.3 0.1 17.3 1 Calculated on the basis of units of 1,000 euros; figures commercially rounded. 38 Change 7.0 % 9.7 % 4.2 % 2.7 % 2.0 % 0.2 % – 9.1 % 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 70 Combined management report Henkel Annual Report 2017 € 2,541 m net income. USA in December 2017. The adjusted tax rate increased year on year by 0.3 percentage points to 25.0 percent after also adjusting for the one-time effect of the tax reform in the USA. Taking this tax effect into consideration, the net income for the year increased by 21.4 percent from 2,093 million euros to 2,541 million euros. After taking into account 22 million euros attributable to non-con- trolling interests, net income attributable to share- holders of Henkel AG & Co. KGaA amounted to 2,519 million euros, 22.7 percent higher than the prior-year figure (2016: 2,053 million euros). Adjusted net income after deducting non-con- trolling interests was 2,534 million euros compared to 2,323 million euros in fiscal 2016. A condensed version of the annual financial statements of the parent company of the Henkel Group – Henkel AG & Co. KGaA – can be found on pages 92 to 95. 39 Net income in million euros 2013 1,625 2014 1,662 2015 1,968 2016 2,093 2017 2,541 0 500 1,000 1,500 2,000 2,500 Earnings per preferred share rose from 4.74 euros to 5.81 euros. Earnings per ordinary share increased from 4.72 euros to 5.79 euros. Adjusted earnings per preferred share rose by 9.1 percent to 5.85 euros (2016: 5.36 euros). In addition to the one-time charges / gains and the restructuring expenses, the exceptional effects of the US tax reform have also been included in the adjustment process. Adjusted earnings per preferred share in euros 40 2013 4.07 2014 4.38 2015 4.88 2016 5.36 2017 5.85 0.0 1.5 3.0 4.5 6.0 Dividend According to our dividend policy, dividend payouts of Henkel AG & Co. KGaA shall, depending on the company’s asset and profit positions as well as its financial requirements, amount to 25 percent to 35 percent of net income after non-controlling interests and adjusted for exceptional items. We will propose to the Annual General Meeting an increased dividend compared to the previous year: 1.79 euros per preferred share and 1.77 euros per ordinary share. The payout ratio would then be 30.7 percent. Preferred share dividend in euros 41 2013 1.22 2014 1.31 2015 1.47 2016 1.62 2017 1.79 1 0.0 0.5 1.0 1.5 2.0 1 Proposal to shareholders for the Annual General Meeting on April 9, 2018. Return on capital employed (ROCE) At 16.3 percent, return on capital employed (ROCE) was below the prior-year figure of 17.5 percent, mainly due to acquisitions. Economic Value Added (EVA®) Economic Value Added (EVA®) increased from 1,463 million euros to 1,610 million euros. Henkel Annual Report 2017 Combined management report 71 Comparison between actual business performance and guidance We updated our guidance for fiscal 2017 in Novem- ber 2017: We confirmed our expectation for organic sales growth of 2 to 4 percent for the Henkel Group. Our expectations for organic growth were 4 to 5 percent for the Adhesive Technologies business unit, 0 to 1 percent for the Beauty Care business unit and around 2 percent for the Laundry & Home Care busi- ness unit. For adjusted return on sales (EBIT), we forecasted an increase to more than 17.0 percent for fiscal 2017 and anticipated that all business units would contribute to this positive performance. We expected an increase in adjusted earnings per pre- ferred share of around 9 percent. With organic growth of 3.1 percent, we achieved our sales growth forecast of 2 to 4 percent. As expected, all business units were within the ranges updated in November 2017. Adjusted return on sales of the Henkel Group increased by 0.4 percentage points to 17.3 percent, which was in line with our guidance. The significant increase in adjusted earnings per preferred share of 9.1 percent to 5.85 euros (2016: 5.36 euros) is consistent with our updated forecast of around 9 percent growth. Our restructuring expenses totaled 245 million euros and were thus within our expected bandwidth of 200 to 250 million euros. Capital expenditures on property, plant and equipment and intangible assets totaled 663 million euros in fiscal 2017. In November 2017, we had forecasted capital expenditures of between 650 million and 750 million euros. Guidance versus performance 2017 42 Organic sales growth Henkel Group: 2–4 percent Henkel Group: 2–4 percent Henkel Group: 3.1 percent Guidance for 2017 Updated guidance for 2017* Performance in 2017 All business units within this range Adhesive Technologies: 4–5 percent Beauty Care: 0–1 percent Laundry & Home Care: ~2 percent Adhesive Technologies: 5.0 percent Beauty Care: 0.5 percent Laundry & Home Care: 2.0 percent Adjusted return on sales (EBIT) Adjusted earnings per preferred share Increase to more than 17.0 percent Increase to more than 17.0 percent Increase to 17.3 percent Increase of 7–9 percent Increase of ~9 percent Increase of 9.1 percent * Updated on November 14, 2017. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 72 Combined management report Henkel Annual Report 2017 Results of operations of the business units Adhesive Technologies Sales growth + 5.0 % organic sales growth Adjusted 1 operating profit Adjusted 1 return on sales € 1,734 m 18.5 % adjusted 1 operating profit (EBIT): up 6.4 percent adjusted 1 return on sales (EBIT): up 0.3 percentage points Overview Despite persisting economic and geopolitical risks, the economic environment in which the Adhesive Technologies business unit operates was characterized by a generally solid upward trend in global industrial production. Key industrial sectors performed better than initially expected. From a regional perspective, economic growth was driven by good performance in the emerging markets, while the mature markets posted solid rates of increase. Within this general economic environment, Adhesive Technologies successfully continued on its path of profitable growth. Through active portfolio manage- ment and innovative product solutions, our sales were able to outperform the market. Adjusted return on sales showed good development. Sales Sales generated by the Adhesive Technologies busi- ness unit increased nominally by 4.8 percent to 9,387 million euros in fiscal 2017. Foreign exchange effects reduced sales growth by 1.3 percent. Acquisi- tions / divestments accounted for 1.1 percent of the growth. Organically (i.e. adjusted for foreign exchange and acquisitions / divestments), sales grew by 5.0 percent. Growth was driven primarily by increased volumes. In the following, we comment on our organic sales performance in the regions. We increased sales significantly in the emerging markets, due particularly to significant sales growth in the Eastern Europe, Latin America and Asia (excluding Japan) regions. Despite continued uncer- Key financials * in million euros Sales 43 Sales development * 2016 2017 +/– in percent 8,961 9,387 Proportion of Henkel sales 48 % 47 % Operating profit (EBIT) 1,561 Adjusted operating profit (EBIT) 1,629 1,657 1,734 Return on sales (EBIT) Adjusted return on sales (EBIT) Return on capital employed (ROCE) 17.4 % 18.2 % 17.7 % 18.5 % 19.9 % 20.3 % 0.4 pp 4.8 % – 6.1 % 6.4 % 0.3 pp 0.3 pp Change versus previous year Foreign exchange Adjusted for foreign exchange Acquisitions / divestments Organic of which price of which volume Economic Value Added (EVA®) 719 831 15.5 % pp = percentage points * Calculated on the basis of units of 1,000 euros; figures commercially rounded. * Calculated on the basis of units of 1,000 euros. 1 Adjusted for one-time charges / gains and restructuring expenses. 44 2017 4.8 – 1.3 6.1 1.1 5.0 0.4 4.6 Henkel Annual Report 2017 Combined management report 73 Sales Adhesive Technologies in million euros 45 At 10.7 percent, net working capital as a percentage of sales was below prior year. Top brands 2013 8,117 2014 8,127 2015 8,992 2016 8,961 2017 9,387 0 2,500 5,000 7,500 10,000 tainty in the political situation and the resulting deterioration in the economic environment, sales in the Africa / Middle East region were on a par with the previous year. Return on capital employed (ROCE) increased year on year to 20.3 percent. At 831 million euros, Eco- nomic Value Added (EVA®) was up 112 million euros versus the previous year. Business areas In the following, we comment on the organic sales performance of our business areas. For details of the activities of the individual business areas, please refer to page 60. Industry business Sales in the Packaging and Consumer Goods Adhe- sives business area showed good performance versus the previous year, not least thanks to our leading portfolio of high-impact and safe solutions for pack- aging used in the food and beverage sectors. Sales performance in the mature markets was good overall, with strong growth in the Western Europe region. Performance in the mature markets of the Asia-Pacific region was good, while growth in the North America region was positive. We posted a very strong increase in sales in our Transport and Metal business area, which was sub- stantially attributable to our numerous applications for automotive manufacturers and their body, powertrain and vehicle interior suppliers. In 2017, we generated more than 80 percent of all sales with our five technology cluster brands in the industrial business, and our four strong brand plat- forms in the consumer business. The proportion of sales from products successfully launched onto the market in the last five years was around 30 percent. Operating profit Adjusted operating profit increased to 1,734 million euros, its highest-ever level. Adjusted return on sales reached a new all-time high of 18.5 percent. Gross margin was lower year on year, due mainly to higher prices for direct materials and to acquisition effects. By taking measures to optimize our organizational structures and improve production and supply chain efficiency, and by raising prices, we were able to reduce their influence on gross margin. Sales increased significantly in the General Industry business area, boosted above all by our activities involving customers operating in the various indus- trial markets and vehicle maintenance, repair and overhaul. Year on year, sales in our Electronics business area showed a double-digit increase. This growth was again primarily driven by our high-impact solutions for consumer electronics manufacturers and by our thermal management products for the electronics industry. Adhesives for Consumers, Craftsmen and Building Sales performance in the Adhesives for Consumers, Craftsmen and Building business area was positive. Our innovations for the construction industry were one of the drivers of this growth. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 74 Combined management report Henkel Annual Report 2017 Beauty Care Sales growth + 0.5 % organic sales growth Adjusted 1 operating profit € 665 m Adjusted 1 return on sales 17.2 % adjusted 1 operating profit (EBIT): up 2.7 percent adjusted 1 return on sales (EBIT): up 0.3 percentage points The professional hair salon market remained under pressure in 2017, especially in the mature markets, due to persistent consumer restraint. In difficult market conditions overall, the Beauty Care business unit was able to continue on its path of profitable growth. Organic sales growth was flat in the Branded Consumer Goods business area. The Hair Salon business area reported good organic sales growth, outperforming the market. This enabled us to further expand our position as the world number three in the hair salon market. Growth in adjusted return on sales was good. Overview In 2017, growth of the world cosmetics sector slowed again in the markets and categories of relevance for the Beauty Care business. In a fiercely competitive environment, development was actually negative in some key markets. In our Branded Consumer Goods business, the mature markets in particular showed weak, and in some cases even negative, development. The perfor- mance of some key market segments in the North America region was slightly negative. The environ- ment in Western Europe was characterized by sus- tained promotional activity, severe price and trade pressure, and declining average prices. Growth in rel- evant categories in individual emerging markets also slowed in 2017. In the Latin America and Eastern Europe regions, for example, market growth was lower year on year. Market developments in the Africa / Middle East and Asia (excluding Japan) regions were positive. Proportion of Henkel sales 20 % 19 % Key financials * in million euros Sales Operating profit (EBIT) Adjusted operating profit (EBIT) Return on sales (EBIT) Adjusted return on sales (EBIT) Return on capital employed (ROCE) 46 Sales development * 2016 2017 +/– in percent 3,838 3,868 526 647 535 665 13.7 % 16.9 % 13.8 % 17.2 % 0.8 % – 1.7 % 2.7 % 0.1 pp 0.3 pp Change versus previous year Foreign exchange Adjusted for foreign exchange Acquisitions / divestments Organic of which price of which volume 18.2 % 17.6 % – 0.6 pp Economic Value Added (EVA®) 266 262 – 1.8 % pp = percentage points * Calculated on the basis of units of 1,000 euros; figures commercially rounded. * Calculated on the basis of units of 1,000 euros. 1 Adjusted for one-time charges / gains and restructuring expenses. 47 2017 0.8 – 1.3 2.1 1.6 0.5 0.1 0.4 Henkel Annual Report 2017 Combined management report 75 48 In 2017, we generated 90 percent of our sales with our top 10 brands. The proportion of sales from prod- ucts successfully launched onto the market in the last three years was around 40 percent. Top brands Sales Beauty Care in million euros 2013 3,510 2014 3,547 2015 3,833 2016 3,838 2017 3,868 0 1,000 2,000 3,000 4,000 Sales Sales generated by the Beauty Care business unit increased nominally by 0.8 percent to 3,868 million euros in fiscal 2017. Foreign exchange effects reduced sales by 1.3 percent. Acquisitions / divestments accounted for 1.6 percent of the growth. Organically (i.e. adjusted for foreign exchange and acquisitions / divestments), sales increased by 0.5 percent. Growth was driven primarily by increased volumes. In the following, we comment on our organic sales performance in the regions. From a regional perspective, the organic growth rate of our business in the emerging markets was posi- tive. In the Africa / Middle East region, the business unit achieved significant organic sales growth. The Latin America region continued the successful trend of previous years with positive sales growth. Sales performance was negative in the Asia (excluding Japan) region due to business development in China. We achieved very strong growth in Eastern Europe. The mature markets continued to be impacted by fierce crowding-out competition and intense price pressure. In a challenging environment, sales in the mature markets were slightly below the previous year’s level due to negative performance in Western Europe and in the mature markets of the Asia-Pacific region. By contrast, growth in the North America region was very strong compared to 2016. Operating profit Adjusted operating profit increased in the reporting period to 665 million euros. Adjusted return on sales exhibited good growth, reaching a new high of 17.2 percent. Our ongoing measures to reduce costs and enhance production and supply chain efficiency enabled us to offset the effects on gross margin exerted by higher prices for direct materials and sustained promotional intensity. At 3.9 percent, net working capital as a percentage of sales was again low, albeit above the prior-year level due partly to acquisitions. At 17.6 percent, return on capital employed (ROCE) was down year on year, also as a result of acquisitions. Economic Value Added (EVA®) was slightly below the prior-year level at 262 million euros. Business areas In the following, we comment on the organic sales performance of our two business areas. For details of the activities of the individual business areas, please refer to page 60. Branded Consumer Goods Sales growth in our Branded Consumer Goods business area was flat in 2017. The Hair Cosmetics business generated positive sales growth, boosted by successful innovations under our Schwarzkopf brand and our newly acquired brands Pert and Xtreme. Hair Salon business Despite the continued restraint apparent in the hair salon market, performance by our Hair Salon busi- ness was again good in 2017, thanks particularly to our North American brands Sexy Hair and Kenra, the launch of our influencer brand #mydentity, and the relaunch by Schwarzkopf Professional of the BlondMe product line. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 76 Combined management report Henkel Annual Report 2017 Laundry & Home Care Sales growth + 2.0 % organic sales growth Adjusted 1 operating profit Adjusted 1 return on sales € 1,170 m 17.6 % adjusted 1 operating profit (EBIT): up 17.0 percent adjusted 1 return on sales (EBIT): up 0.3 percentage points Overview In 2017, the relevant world market for laundry and home care showed a positive development. Eastern Europe recorded strong growth. In Latin America, performance in the relevant market for laundry and home care products was also strong. Market performance in the mature markets was slightly positive. The relevant market for laundry and home care declined slightly in Western Europe. Mar- ket performance in North America was positive. Developments in the emerging markets varied. Growth in our relevant markets in the Africa / Middle East region was slightly negative as a result of the challenging market environment. The market in Although our relevant markets continued to be char- acterized by intense price and promotional competi- tion, we were able to again outperform the relevant market in terms of growth in 2017. Both the sus- tained success of our strong brands and the success- ful introduction of our innovations contributed to the good performance. Growth in adjusted return on sales was good. The business unit therefore contin- ued its path of profitable growth again in 2017. Key financials * in million euros Sales 49 Sales development * 2016 2017 +/– in percent 5,795 6,651 14.8 % Change versus previous year Proportion of Henkel sales Operating profit (EBIT) 31 % 803 Adjusted operating profit (EBIT) 1,000 33 % 989 1,170 – 23.2 % 17.0 % Foreign exchange Adjusted for foreign exchange Acquisitions / divestments Return on sales (EBIT) Adjusted return on sales (EBIT) Return on capital employed (ROCE) 13.9 % 17.3 % 14.9 % 17.6 % 1.0 pp 0.3 pp 15.7 % 13.1 % – 2.6 pp Economic Value Added (EVA®) 344 309 – 10.1 % Organic of which price of which volume pp = percentage points * Calculated on the basis of units of 1,000 euros; figures commercially rounded. * Calculated on the basis of units of 1,000 euros. 50 2017 14.8 – 3.4 18.2 16.2 2.0 0.1 1.9 1 Adjusted for one-time charges / gains and restructuring expenses. Henkel Annual Report 2017 Combined management report 77 Top brands Operating profit Adjusted operating profit (EBIT) rose by 17.0 percent from 1,000 million euros to 1,170 million euros. Adjusted return on sales in the Laundry & Home Care business unit increased to a new all-time high of 17.6 percent (previous year: 17.3 percent). Gross mar- gin was lower year on year due to acquisition effects, higher prices for direct materials and the adverse impact of sustained promotional intensity. Net working capital as a percentage of sales was above the previous year’s level, but still low at –2.4 percent. At 13.1 percent, return on capital employed (ROCE) was lower year on year due to acquisitions. With a figure of 309 million euros, Economic Value Added (EVA®) was below the prior-year level of 344 million euros, also as a result of acquisitions. Business areas In the following, we comment on the organic sales performance of our two business areas. For details of the activities of the individual business areas, please refer to page 60. Laundry Care Sales performance in the Laundry Care business area was positive, boosted substantially by our core brand Persil. Fabric softeners also contributed to this per- formance with good growth helped, in particular, by the introduction of successful innovations. Home Care Sales growth in the Home Care business area was strong in 2017. Products for WC applications were again the biggest drivers of growth. Sales Laundry & Home Care in million euros 51 2013 4,580 2014 4,626 2015 5,137 2016 5,795 2017 6,651 0 2,000 4,000 6,000 8,000 Sales Sales generated by the Laundry & Home Care busi- ness unit increased nominally by 14.8 percent to 6,651 million euros in fiscal 2017. Foreign exchange effects reduced sales growth by 3.4 percent. Acquisi- tions / divestments accounted for 16.2 percent of the growth. Organically (i.e. adjusted for foreign exchange and acquisitions / divestments), sales increased by 2.0 per- cent. Sales performance was largely driven by increas- ing volumes. In the following, we comment on our organic sales performance in the regions. The emerging markets registered a good increase in sales and were once again the biggest driver of organic growth in Laundry & Home Care. This perfor- mance was helped by very strong growth in the Asia (excluding Japan) region. Sales performance was also very strong in the Eastern Europe region and positive in the Africa / Middle East region. Due to intense price and promotional competition, sales growth in Latin America was negative. Market performance in the mature markets was posi- tive. Sales increased very strongly in the North Amer- ica region but decreased in the Western Europe region. In 2017, we generated around 65 percent of our sales with our top 10 brand clusters. A brand cluster com- prises individual global and local brands that share a common brand positioning internationally. The pro- portion of sales from products successfully launched onto the market in the last three years was around 45 percent. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 78 Combined management report Henkel Annual Report 2017 € 663 m investments in property, plant and equipment and intangible assets. Net assets and financial position Acquisitions and divestments Effective July 3, 2017, we completed the acquisition of the global Darex Packaging Technologies business from GCP Applied Technologies, including all associ- ated shares. The transaction is in line with our strat- egy to strengthen our portfolio through targeted acquisitions and reinforces the position of our Adhe- sive Technologies business as global market and technology leader. Effective July 3, 2017, we completed the acquisition of all shares of Sonderhoff Holding GmbH based in Cologne, Germany. This acquisition expands the sealant expertise of Henkel and reinforces the posi- tion of our Adhesive Technologies business as global market and technology leader. Effective September 1, 2017, the acquisition of all shares of Nattura Laboratorios, S.A. de C.V., Mexico, and associated companies in the USA, Colombia and Spain was completed. Through this acquisition, Henkel will further strengthen its Hair Salon busi- ness and expand its footprint in both the emerging and mature markets. Effective December 28, 2017, we completed the acqui- sition of all shares of Zotos International Inc., the North American hair salon business of Shiseido Company, Limited. This acquisition is part of our strategy to strengthen Henkel’s position in attractive markets and categories. To this end, we are expanding our Hair Salon business in the USA, which is the world’s largest single professional hairdressing market. On January 1, 2017, Henkel sold its professional Western European building material business. In the first half of 2017, we sold our global electronic mold compound business, including Henkel Huawei Electronics, our company in Lianyungang, China. Additional disclosures relating to the acquisitions and divestments can be found on pages 116 and 117 of the notes to the consolidated financial statements. Neither the acquisitions and divestments nor other measures undertaken resulted in any material changes in our business and organizational struc- ture. For detailed information on our organization and business activities, please refer to the disclo- sures on pages 59 and 60. Our long-term ratings remain at “A flat” (Standard & Poor’s) and “A2” (Moody’s). We intend to maintain a solid “A” rating to ensure our continued unrestricted access to the money and capital markets and to favorable financing terms and conditions. Capital expenditures In the reporting period, capital expenditures (exclud- ing acquisitions) amounted to 663 million euros. Investments in property, plant and equipment for existing operations totaled 590 million euros, follow- ing 460 million euros in 2016. Capital expenditures on property, plant and equipment totaled 230 million euros (previous year: 187 million euros) in the Adhe- sive Technologies business unit, 80 million euros (previous year: 54 million euros) in Beauty Care, and 274 million euros (previous year: 210 million euros) in Laundry & Home Care. We invested 73 million euros in intangible assets (previous year: 83 million euros). Around two-thirds of the expenditures were chan- neled into expansion projects, innovations and streamlining measures, which included increasing our production capacity, introducing innovative product lines, and optimizing our production struc- ture and business processes. The major projects of 2017 were as follows: • Construction of a new production site for indus- trial adhesives and metal pretreatment products in India (Adhesive Technologies) • Construction of a new production facility for prod- ucts used in the aviation industry in Spain (Adhe- sive Technologies) • Expansion of a production site in Russia and of the production capacity for colorants, liquid products and aerosols (Beauty Care) • Construction of a new production site for liquid products in Egypt (Laundry & Home Care) • Expansion of warehousing and logistics capacities in Germany (Laundry & Home Care) • Global optimization of our supply chain and con- solidation and optimization of our IT system architecture for managing business processes In regional terms, capital expenditures focused pri- marily on Western Europe, Eastern Europe and North America. The acquisitions resulted in additions to intangible assets and property, plant and equipment in the amount of 1,818 million euros. Details of these addi- tions can be found on pages 125 to 130 of the notes to the consolidated financial statements. Henkel Annual Report 2017 Combined management report 79 Capital expenditures by business unit 1 52 Adhesive Technologies 40 % Corporate 1 % Beauty Care 15 % Laundry & Home Care 44 % 1 Existing operations. Capital expenditures 2017 53 in million euros Intangible assets Property, plant and equipment Total Existing operations Acquisitions Total 73 590 663 1,640 178 1,818 1,713 768 2,481 Financial structure in million euros Net assets Compared to year-end 2016, total assets rose by 0.3 billion euros to 28.3 billion euros. Under non-current assets, intangible assets increased by 89 million euros, and property, plant and equipment by 118 million euros. The increase was mainly due to acquisitions but was reduced by negative foreign exchange effects. Capital expendi- tures of 590 million euros on property, plant and equipment were partially offset by depreciation of 401 million euros. Current assets increased from 8.2 billion euros to 8.5 billion euros. This was attributable in particular to an increase in other financial assets and higher trade accounts receivable. Cash and cash equivalents decreased by 473 million euros in the reporting period. Compared to year-end 2016, equity including non-controlling interests increased by 0.5 billion euros to 15.7 billion euros. The individual compo- nents influencing equity development are shown in the consolidated statement of changes in equity on page 111. Equity rose with the addition of net income amounting to 2,541 million euros. The dividend dis- tribution in April 2017 and negative foreign exchange effects of 1,334 million euros had a countervailing effect on equity. At year-end 2017, the equity ratio had increased by 1 percentage point to 55.3 percent. 54 Assets of which in % Equity and liabilities of which in % 27,951 28,307 28,307 27,951 Non-current assets thereof: Intangible assets / property, plant and equipment 71 66 Current assets thereof: Cash and cash equivalents 29 5 70 66 30 3 55 54 Equity 17 3 11 27 5 21 4 12 25 2 Non-current liabilities thereof: Pension obligations thereof: Borrowings Current liabilities thereof: Borrowings 2016 2017 2017 2016 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 80 Combined management report Henkel Annual Report 2017 The cash outflow from cash flow from financing activities of –415 million euros (2016: 1,678 million euros) resulted mainly from dividend payments. In addition, the volume of bond issues decreased ver- sus the prior year. Cash and cash equivalents decreased compared to December 31, 2016 by 473 million euros to 916 mil- lion euros. The decrease in free cash flow to 1,701 million euros in 2017 (2016: 2,205 million euros) resulted from lower cash flow from operating activities and increased capital expenditures on intangible assets and property, plant and equipment, including payments on account. Financing and capital management Financing of the Group is centrally managed by Henkel AG & Co. KGaA. Funds are, as a general rule, obtained centrally and distributed within the Group. Our financial management is based on the financial ratios defined in our financial strategy (see table of key financial ratios on the right). We pursue a con- servative and flexible investment and borrowings policy with a balanced investment and financing portfolio. The primary goals of our financial manage- ment are to secure the liquidity and creditworthiness of the Group, together with ensuring access at all times to the capital market, and to generate a sus- tainable increase in shareholder value. Measures deployed in order to achieve these aims include opti- mization of our capital structure, adoption of an appropriate dividend policy, equity management and debt reduction. Our capital needs and capital pro- curement activities are coordinated to ensure that requirements with respect to earnings, liquidity, security and independence are taken into account and properly balanced. In fiscal 2017, Henkel paid a higher dividend for both ordinary and preferred shares compared to 2016. Cash flows not required for capital expenditures, dividends and interest payments were used for allo- cations to pension funds and to finance acquisitions. We covered our short-term financing requirement primarily through commercial paper. Our multi- currency commercial paper program is additionally secured by a syndicated credit facility. Non-current liabilities decreased by 0.9 billion euros to 4.9 billion euros. This was mainly due to the reduction in borrowings following the reclassifica- tion of a bond and to lower pension obligations. The latter decreased due to the above-average return earned on the plan assets. Current liabilities increased by 0.7 billion euros to 7.7 billion euros, mainly as a result of higher borrow- ings following the issuance of commercial paper, and of the reclassification of a bond for maturity reasons. € –3,225 m net financial position. Effective December 31, 2017, our net financial posi- tion 1 amounted to –3,225 million euros (December 31, 2016: –2,301 million euros). The change compared to the end of the previous year was primarily due to payments for acquisitions. Net financial position in million euros 2013 2014 2015 2016 2017 55 959 – 153 335 – 2,301 – 3,225 Financial position At 2,468 million euros, cash flow from operating activities in 2017 was lower versus the previous year (2,850 million euros). The decrease was mainly attributable to cash outflows in respect of invento- ries, lower inflows from trade accounts payable, and higher outflows from trade accounts receivable. Year on year, net working capital 2 as a percentage of sales increased by 1.3 percentage points to 4.8 per- cent, partly due to acquisitions. The cash outflow in cash flow from investing activities (–2,451 million euros) was below the figure of the prior-year period (–4,250 million euros) as a result of lower investments in subsidiaries and other business units. 1 Cash and cash equivalents plus readily monetizable financial instruments classified as available for sale or using the fair value option, less borrowings, plus positive and less negative fair values of hedging transactions. 2 Inventories plus payments on account, receivables from suppliers and trade accounts receivable, less trade accounts payable, liabilities to customers, and current sales provisions. Henkel Annual Report 2017 Combined management report 81 Net financial position in million euros 56 – 2,301 1,701 – 736 – 112 – 1,987 1 210 2 –3,225 At December 31, 2016 Free cash flow Dividends paid Allocations to pension funds Payments for acquisitions Other At December 31, 2017 1 Including purchase of non-controlling interests with no change of existing control. 2 Primarily foreign exchange effects. Key financial ratios Our operating debt coverage in the reporting period was above the minimum of 50 percent, as it was at year-end 2016. The interest coverage ratio has decreased to 79.3. Key financial ratios Operating debt coverage (net income + amortization and depreci- ation, impairment and write-ups + inter- est element of pension obligations) / net borrowings and pension obligations Interest coverage ratio (EBITDA / interest result including inter- est element of pension obligations) Equity ratio (equity / total assets) 58 2016 2017 80.8 % 80.9 % 107.9 79.3 54.3 % 55.3 % Our credit rating is regularly reviewed by the two rating agencies Standard & Poor’s and Moody’s. As in previous years, our ratings remain within the sin- gle-A target corridor, at A/A–1 (Standard & Poor’s) and A2/P1 (Moody’s). Both Standard & Poor’s and Moody’s continue to rate Henkel as investment grade, which is the best possible category. Credit ratings 57 Standard & Poor’s Moody’s Long term Outlook Short term A Stable A–1 At December 31, 2017 A2 Stable P1 As of December 31, 2017, our borrowings totaled 4,344 million euros and mainly comprised bonds issued, a syndicated bank loan and commercial paper. Henkel’s financial risk management activities are explained in the risks and opportunities report on pages 96 to 103. Further detailed information on our financial instruments can be found in the financial instruments report on pages 149 to 161 of the notes to the consolidated financial statements. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 82 Combined management report Henkel Annual Report 2017 Employees Employees by organizational unit 60 Our employees shape our company through their commitment, knowledge and skills. They are instru- mental in driving our long-term success. We strive to foster a corporate culture that is agile, motivational and based on performance, to enable us to drive our 2020+ strategic priorities together. To achieve this goal, we create a working environment that is inspirational, based on trust and focused on team spirit – all of which builds on an open and appre- ciative leadership culture. We specifically nurture our employees and support their personal develop- ment to strengthen their loyalty and motivation. What makes Henkel special Everyone who works at Henkel moves in an environ- ment characterized by its global nature and diversity. We are represented by around 53,700 employees (as at year-end 2017) with 120 different nationalities operat- ing in 78 different countries. At December 31, 2017, the number of employees had thus risen compared to around 51,350 as of year-end 2016. This growth is pri- marily attributable to our acquisitions, through which we gained around 3,400 employees. We strive to inte- grate all new employees quickly and in a respectful manner, as demonstrated, for example, by our merger of The Sun Products Corporation, which we acquired in 2016, with Henkel Consumer Goods in the USA: By August 2017 we were already able to bring the employees from both companies together at our new site in Stamford, Connecticut. Our three business units and central functions offer numerous vocational options. With our versatile orga- nizational structure, we can offer our employees indi- vidual career opportunities. We value diversity in our workforce. The age structure of our employees has been constant and balanced for years. To keep it that way, and in response to demo- graphic change, we strive to offer equal encouragement to all generations at Henkel and to take different life phases into consideration. Moreover, 34.5 percent of the managers at our company are women. We want the diversity in our workforce to reflect the diversity in our customer structure. Adhesive Technologies 49 % Functions 14 % Beauty Care 18 % Laundry & Home Care 19 % At December 31, 2017 Throughout the Group, we are focusing increasingly on digital communication platforms to foster and energize exchange across department, country or hier- archy boundaries. Our HR systems have been specifi- cally extended for senior management, and optimized for use on mobile devices. This enables our executives to access key employee data flexibly and at any time, to respond more quickly to issues raised by employ- ees, and to fulfill their leadership duties. Energized and empowered teams We want our employees themselves to be able to adjust their work hours and workplace to suit the requirements of their jobs and their personal needs. They consciously incorporate the opportunities offered by digitalization in their daily work processes. We have set up activity-based workspaces at eight sites. These flexible office landscapes offer our employees a choice of workplaces to suit a relevant activity, thus providing the best possible environment for them to work in. We also continue to support the use of our flexible work models. Together with a willingness to perform, mutual trust is essential for this degree of flexibility when shaping individual work models. We hold regular assessment meetings and provide open feedback to specifically promote the develop- ment of our people. As part of our globally standard- ized assessment process, our senior managers discuss the performance and potential with their respective employees. Individual training programs and potential career moves are also discussed. Women in management 61 Payroll cost and average headcount Payroll cost in million euros Average headcount 2016 3,001 49,950 59 2017 3,167 in percent Henkel 51,950 Managers Top managers 1 2013 2014 2015 2016 2017 32.9 31.6 19.8 33.2 32.5 20.6 33.6 33.1 21.1 33.1 34.3 22.5 34.3 34.5 23.2 1 Corporate Senior Vice Presidents, management circles I and IIa. Henkel Annual Report 2017 Combined management report 83 Employees by activity 62 Employees by age group 63 Research and development 5 % Administration 15 % Marketing, selling and distribution 26 % Production and engineering 54 % 16–29 years 17 % 30–39 years 33 % 50–65 years 23 % 40–49 years 27 % At December 31, 2017 At December 31, 2017 Recruiting, developing and retaining talents We constantly strive to recruit talents for Henkel that best fit our culture and objectives. Our local recruitment partners advise our departments and focus individually on each of our applicants. Increasingly, we also actively approach potential candidates through digital networks as a quick and easy means of reaching out to our digitally savvy target groups. Recruitment research in professional networks also allows us to focus more closely on fill- ing vacancies that require special expert knowledge. In some countries, our employees can make use of the new “Refer a Talent” digital platform to recom- mend suitable candidates directly for an appropri- ate vacancy. We place great importance on in-house training and professional development. Our efforts include con- sideration of the various approaches to training at the local level. Henkel offers 27 apprenticeship and dual-track study programs in Germany. In 2017, 165 new apprentices and students started working toward a professional qualification at Henkel in Germany. In some emerging markets, we have established special in-house training programs for professionals and executives. One example is our management trainee program in Asia. We have also further improved EXCEED, our junior management training program especially tailored to the needs of the emerging markets. Ongoing training opportunities are made available to our employees, with digital platforms making it par- ticularly easy to access training content quickly and flexibly. Since we introduced Lynda.com throughout the company in spring 2017, our employees have been able to take advantage of a regularly updated portfolio of training videos which can also be accessed on mobile devices. We also provide guidelines on personal career development and have revised our globally standardized management selection program. Employees (At December 31) Western Europe Eastern Europe Africa / Middle East North America Latin America Asia-Pacific 2013 14,400 9,600 4,800 5,150 3,750 9,150 % 30.7 20.5 10.2 11.0 8.0 19.6 Total 46,850 100.0 2014 14,900 10,000 4,850 6,200 3,650 10,150 49,750 % 30.0 20.1 9.7 12.5 7.3 20.4 100.0 2015 14,900 9,800 4,700 6,250 3,500 10,300 49,450 % 30.2 19.8 9.4 12.7 7.1 20.8 100.0 2016 14,450 9,500 5,250 8,300 3,550 10,300 51,350 % 28.1 18.5 10.2 16.2 6.9 20.1 2017 14,750 9,950 4,750 9,050 5,500 9,700 64 % 27.5 18.5 8.8 16.9 10.2 18.1 100.0 53,700 100.0 Basis: Permanent staff excluding apprentices. Figures rounded. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 84 Combined management report Henkel Annual Report 2017 Procurement We use externally sourced materials (raw materials, packaging and purchased goods) and services to produce our finished products. These items all fall under the general category of direct materials. Exam- ples include washing-active substances (surfactants), adhesive components, cardboard boxes and external filling services. Aside from supply and demand, the prices of direct materials are mainly determined by the prices of the input materials used to manufacture them. The markets for raw materials were very volatile in 2017. Following sharp increases in the first quarter, prices of crude oil and petrochemicals eased in the second quarter before notably picking up again in the second half of the year. On average, prices for crude oil and petrochemicals were significantly higher year on year. The price trend for palm kernel oil was also volatile, with average prices slightly lower in 2017 compared to the previous year. Prices for corrugated paper and cardboard rose steadily over the course of 2017. Overall, prices for direct materials in 2017 were moderately higher versus the prior year. Direct material expenditures amounted to 8.5 billion euros and were therefore higher than 2016. Savings from cost reduction measures coupled with improve- ments in production and supply chain efficiency enabled us to partially offset rising material prices, higher sales volumes and acquisition effects. Our five most important groups of raw materials within the direct materials category are washing- active substances (surfactants), raw materials for use in hotmelt adhesives, water- and acrylic-based adhe- sive raw materials, raw materials for polyurethane- based adhesives, and inorganic raw materials. These account for around 35 percent of our total direct material expenditures. Our five largest suppliers represent around 13 percent of purchasing volume in direct materials. Indirect materials and services are not directly used in the production of our finished products. Examples include maintenance materials, logistics, marketing and IT services. Gross prices in these areas rose slightly in 2017, but we were able to overcompensate for the increases through our global procurement strategy and structural cost reduction measures. At 4.5 billion euros, expenditure on indirect materials and services in 2017 was lower year on year. In order to improve efficiency and secure material supplies, we continuously optimize our value chain while ensuring that we maintain or improve our level of quality. In addition to negotiating new, com- petitive contract terms, our ongoing initiative to lower total procurement expenses is a major factor in the success of our global purchasing strategy. Together with the three business units, Purchasing works continuously on reducing product complexity, optimizing the raw materials mix and further stan- dardizing packaging and raw materials. We enter into long-term business relationships with selected sup- pliers to encourage the development of innovations, and to optimize manufacturing costs and logistics processes. At the same time, we ensure the risk of supply shortages is minimized. We also agree and implement individual targets with our strategic suppliers to strengthen our negotiating position and give us greater flexibility in consolidating our supplier base. We were able to increase the efficiency of our pur- chasing activities by further standardizing, automat- ing and centralizing our procurement processes. In addition to making use of eSourcing tools to support our purchasing operations, we have also pooled large portions of our purchasing administration activities – such as order processing, price data maintenance and reporting activities – within our shared service centers. We are also continuing to progress the digi- talization of our purchasing activities. For example, we optimized collaboration with our strategic suppliers through digital communication platforms and increased transparency along the value chain through new digital applications. We are also integrating our production, logistics and purchasing activities across all business units in one integrated Global Supply Chain organization managed from its head office in Amsterdam and from a branch office in Singapore. Material expenditures by business unit 65 Beauty Care 15 % Adhesive Technologies 48 % Laundry & Home Care 37 % At December 31, 2017 Henkel Annual Report 2017 Combined management report 85 Given the uncertainties with respect to raw material price changes and ensuring supply in the procure- ment markets, risk management is an important part of our purchasing strategy. The emphasis here is on reducing price and supply risks while maintaining consistently high quality. As part of our active price management approach, we employ strategies to safeguard prices over the longer term. These are implemented both by means of contracts and, where appropriate and possible, through financial hedging instruments. In order to minimize the risk of supplier default, we stipulate supplier default clauses and perform detailed risk assessments of suppliers to determine their financial stability. With the aid of an external, independent financial services provider, we continuously monitor important suppliers whose financial situation is seen as critical. If a high risk of supplier default is identified, we systematically prepare back-up plans in order to ensure uninterrupted supply. Material expenditures by type 66 Purchased goods and services 17 % Raw materials 61 % Packaging 22 % At December 31, 2017 Production In 2017, Henkel manufactured products at 188 sites in 57 countries. Our largest production facilities are located in Bowling Green, USA, and in Düsseldorf, Germany. We manufacture laundry detergents and household cleaners in Bowling Green. In Düsseldorf, we produce not only laundry detergents and house- hold cleaners but also adhesives for consumers and craftsmen, and products for our industrial customers. Cooperation with toll manufacturers is an integral component of our production strategy, enabling us to optimize our production and logistics structures when entering new markets or when volumes are still small. We currently purchase around 10 percent in additional production tonnage from toll manufac- turers each year. Number of production sites Adhesive Technologies Beauty Care Laundry & Home Care Total 67 2017 146 11 31 188 2016 134 7 30 171 The number of Adhesive Technologies production sites increased from 134 to 146 in fiscal 2017 follow- ing the acquisition of Darex Packaging Technologies and the Sonderhoff Group. The global production network of the business unit is strictly aligned to the business growth and the increasing demand encoun- tered in emerging markets. Capital expenditures are used to expand capacities, predominantly in emerging markets. At the same time, we invest in the implementation of customer-specific requirements in the mature markets. Focal areas include targeted optimization of our production network based on cutting-edge technologies so as to leverage economies of scale, and cost and quality advantages in the man- ufacture of our products. Our multi-technology sites play a particularly important role as they combine various manufactur- ing technologies cost-efficiently within a shared infrastructure. During the course of the reporting period, we continually expanded production capac- ity at our facility in China. A new factory in India will start production in 2018. A further plant is currently being built in Turkey. These sites are crucial to ensuring supply efficiency within the dynamically growing market environment. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 86 Combined management report Henkel Annual Report 2017 To raise production efficiency and further improve our service quality we have put Industry 4.0 activi- ties in place at various production sites that enable the networked handling of key data designed to facilitate management of the entire logistics and pro- duction process from the suppliers through to the customers. The number of sites in our Beauty Care production network has increased to eleven. Acquisitions have resulted in an extension of our production footprint in Latin America and the USA, with plans for further expansion of the new facilities also in the pipeline. To ensure long-term growth – especially in emerging markets – we are investing in capacities and technol- ogies based on our supply network strategy. In East- ern Europe, we have further expanded our factory in Russia, thus significantly increasing production capacity in all three key technologies – colorants, liquid products and aerosols. We also have specifically expanded capacity at sites in North America and Europe. Another focal point of the business unit is the fur- ther improvement of our delivery service to custom- ers in a volatile market environment. By integrating our planning processes along the entire supply chain – from suppliers to production to the interface with our customers – we can improve our ability to predict customer needs. The implementation of various Industry 4.0 initiatives will also increase process transparency. The ability to promptly analyze big data can both speed up the decision- making process and make it more efficient. The production network in our Laundry & Home Care business unit grew by one to 31 sites in 2017. Our new plant near Cairo, Egypt, is designed to ensure efficient supply to emerging markets in the Middle East. We have specifically expanded our pro- duction capacity to facilitate further increases in production volume in response to ongoing good organic and additional acquisitions-related growth. Our focus on further developing the Henkel Produc- tion System has enabled us to steadily enhance the capabilities and efficiency of our plants. Integrating the production plants acquired through our acquisi- tions in 2016 was another focal area that demanded our attention. To further improve our customer service, we imple- mented numerous Industry 4.0 initiatives to digi- talize our production processes and production management. We also started operation of the expanded finished goods warehouse at our main plant in Düsseldorf in the year under review. This fully automatic distribution center underpins our ability to supply all core markets in Central and Northern Europe efficiently and at the lowest possi- ble cost. Pooling the purchasing, production and logistics activities of all business units in a Global Supply Chain organization enables us to develop our global processes more quickly. For all business units, we have the environmental management systems at numerous sites externally certified. By the end of 2017, around 80 percent of our production volume came from sites certified to ISO 14001, the internationally recognized standard for environmental management systems. Henkel Annual Report 2017 Combined management report 87 Our capital expenditures and the capabilities of our highly qualified employees form the foundation on which the success of our R&D activities is built. Moreover, our Group-wide cooperation models, successful project outsourcing as part of our Open Innovation strategy, the expansion of our corporate venture activities, and the relocation of resources to emerging markets all demonstrate our ongoing focus on innovation and our concerted efforts to continu- ously reduce our resource consumption while main- taining or improving performance. Key R&D figures 70 R&D expenditures 1 (in million euros) R&D expenditures 1 (in percent of sales) Employees 2 (annual average) 2013 2014 2015 2016 2017 414 410 464 460 469 2.6 2.5 2.6 2.5 2.3 2,600 2,650 2,800 2,700 2,700 1 Adjusted for restructuring expenses. 2 Figures rounded. Strengthening research and development together The research and development experts in the three business units align their project portfolios to the specific needs of their individual businesses. They work together on fundamental processes, basic inno- vation, evaluating partners for innovation, and on sustainability. The Research and Development Com- mittee is responsible for Group-wide coordination. The business units also continually update one another on innovations in common areas of know- ledge. Examples include encapsulation technologies that are used by all business units, or surface-modi- fying technologies. Research and development Expenditures by the Henkel Group for research and development (R&D) in fiscal 2017 increased to 476 million euros (2016: 463 million euros). Expressed as a percentage of sales, R&D expenses were at 2.4 percent (2016: 2.5 percent). Adjusted for restruc- turing expenses, R&D expenses increased to 469 mil- lion euros. The ratio of adjusted expenses to sales was 2.3 percent (2016: 2.5 percent). In 2017, internal personnel expenses accounted for around 60 percent of total R&D spending. Our research and development costs were fully expensed; no product- or technology-related development costs were capitalized in accordance with International Financial Reporting Standards (IFRSs). On an annual average, around 2,700 employees worked in research and development (2016: also around 2,700). This corresponds to around 5 percent of the total workforce. Our teams are composed of natural scientists – predominantly chemists – as well as material scientists, engineers and technicians. R&D expenditures 1 in million euros 68 2013 415 2014 413 2015 478 2016 2017 463 476 0 100 200 300 400 500 1 Including restructuring expenses of 1 million euros (2013), 3 million euros (2014), 14 million euros (2015), 3 million euros (2016), 7 million euros (2017). R&D expenditures by business unit 69 Beauty Care 15 % Adhesive Technologies 59 % Laundry & Home Care 26 % 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 88 Combined management report Henkel Annual Report 2017 Selected research and development sites 71 Madison Heights, USA Bridgewater, USA Stamford / Trumbull, USA Rocky Hill, USA Irvine, USA Guadalajara, Mexico Toluca, Mexico Bogotá, Colombia Düsseldorf, Germany Hamburg, Germany Heidelberg, Germany Moscow, Russia Dublin, Ireland Barcelona, Spain Dubai, United Arab Emirates Shanghai, China Seoul, South Korea Tokyo, Japan Pune, India São Paulo, Brazil Johannesburg, South Africa Sydney, Australia Open Innovation As our innovations come from both internal and external sources, the concept of Open Innovation continues to hold great significance for us. Accord- ingly, we have intensified our efforts to involve external partners such as universities, research institutes and suppliers in many of our development projects. Corporate venture capital Henkel is striving to gain access to strategically relevant new technologies, applications and busi- ness models by partnering with, and investing in, start-ups with digital or technological expertise. To achieve this aim, Henkel further expanded its venture capital activities in 2017, now pooled within the Henkel Ventures unit. Henkel also strengthened its expertise by investing in start-up companies. Our investment in start-up NBD Nanotechnologies, Boston, USA, has enabled us to expand our know- how in the field of innovative surface technologies. Our printed electronics technology portfolio has been strengthened with the addition of our invest- ment in Copprint Technologies LTD, Jerusalem, Israel. In addition, we raised our investment in Zipjet. Operating in the digital on-demand domain, this start-up offers a mobile laundry and dry cleaning service in London, Paris and Berlin. Research and development worldwide In addition to its central research laboratories, Henkel maintains regional research and development sites in all regions around the world as hubs for innovative problem-solving. Worldwide research and develop- ment activity is managed globally by the business units. Research-intensive base technologies are developed at a central location with optimal access to external resources. These basic technologies are applied in the regional research and development sites to customer- and market-specific innovations. At the same time, the research and development staff in the regional sites obtain information about specific problems for the next generation of innovations, working in close contact with markets and customers. The new base technologies needed for the relevant solutions are again developed centrally. The Adhesive Technologies business unit offers its customers cutting-edge technology development and comprehensive design and application support. A global network of regional research and develop- ment centers combined with local development and technology laboratories enables customers to access Henkel innovations in a wide range of applications. Building on a broad portfolio of technologies, prod- ucts are quickly adapted to specific customer appli- cations. Global, strategically relevant innovation pro- grams effectively drive future growth. Henkel Annual Report 2017 Combined management report 89 The increasing importance of the emerging markets is also reflected in the R&D strategy of the Beauty Care business unit. In the regional testing and devel- opment centers in Shanghai, China, in Johannesburg, South Africa, and in Bogotá, Colombia, individual hair care products are developed that take account of local distinctions and specific consumer needs. The acquisition of Nattura Laboratorios included a new research and development site in Guadalajara, Mexico, where product innovations are developed for both our Hair Salon and Branded Consumer Goods businesses. The Laundry & Home Care business unit uses its global network to develop tailor-made laundry deter- gents and household cleaners for both emerging markets and industrialized countries. The base tech- nologies are developed centrally in Europe before being translated into new products for the specific markets at the regional test and development cen- ters. The immediate proximity to markets is assured by our regional development centers, where we ana- lyze consumer habits and specific needs on an ongo- ing basis. Outside Europe, we operate centers in the USA, Mexico, Russia, the United Arab Emirates, South Korea and Australia. Contributing to sustainability Worldwide, growth and quality of life need to be decoupled from resource use and emissions. Our contribution here lies in the development of innova- tive products and processes that consume less resources while offering the same or better perfor- mance. It is therefore both our duty and our desire to ensure that all new products contribute to sustain- able development in at least one of our six defined focal areas. These are systematically integrated within our innovation process. Early on, our researchers must demonstrate the specific advan- tages of their project in regard to product perfor- mance, added value for our customers, resource effi- ciency, and social progress. We thus aim to combine product performance and quality with social and environmental responsibility. Our focus in this respect is on two goals. The first is to continuously improve, in collaboration with our suppliers, the sustainability profile of the raw materials we use. The second is to help our customers and consumers reduce energy use and carbon dioxide emissions through our innovations. Life cycle analyses, profiles of potential raw materials and packaging options, and our many years of experience in sustainable development help us to identify and evaluate improvement opportunities right from the start of the product development process. A key tool in this respect is our Henkel Sustainability#Master®. This evaluation system cen- ters around a matrix based on the individual steps in our value chain and on our six focal areas. It shows which areas are most relevant from a sustainability perspective, and allows a transparent and quantifiable comparison to be made between two products or processes. Patents and registered designs We hold nearly 9,200 patents to protect our technol- ogies around the world. Approximately 5,850 patents are currently pending. And we have registered just over 1,550 design patents to protect our intellectual property. Further information on our research and develop- ment activities can be found on our website www.henkel.com/brands-and-businesses 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 90 Combined management report Henkel Annual Report 2017 Marketing and distribution We put our customers and consumers at the center of what we do. We offer them maximum benefit, quality and service, together with attractive innova- tions, brands and technologies to create sustainable value. The Adhesive Technologies business unit leads the global market with high-impact solutions. The com- prehensive portfolio featuring groundbreaking inno- vations, tailor-made products and strong brands is aligned to the globally specialized markets for adhe- sives, sealants and functional coatings. Working in close partnership with our customers, we combine innovation and technology leadership to develop solutions that are essential components in industrial and consumer goods around the world. We develop the marketing strategies for our brands and technologies at both the global and regional level. The measures derived from our planning are then implemented locally. Within our branding strat- egy, we consistently leverage our five global technol- ogy cluster brands in the industrial markets and our four brand platforms in the consumer business. Our relationships with around 130,000 direct indus- try and retail customers are managed primarily by our own sales teams, while our retail customers ser- vice the needs of private users, craftsmen and smaller industrial customers. We foster long-term relationships with our customers through our team of around 6,500 technical experts. We therefore have an in-depth understanding of the various applications. In light of the significant com- plexity of many of our solutions and technologies, technical customer service and thorough user training are of key importance. Our global presence enables us to provide technical services to customers world- wide, as well as in-depth product training on site. Following the global rollout of a digital customer management platform, we are now able to service our customers even more quickly and efficiently. The use of mobile devices enables our sales agents to access relevant information anywhere and at any time, and also to speed up processes. comprehensive user experience. We are planning to extend the rollout of the Henkel Adhesives eShop to Europe and Latin America in 2018. In addition to digital communications, we strive to optimize our approach to consumers and craftsmen through the continued use of conventional adver- tising coupled with measures to attract our target groups at the point of sale. Leveraging our close customer relationships and our comprehensive tech- nical expertise, we continue to offer tailored solu- tions and innovative branded products that provide sustainable added value for our customers. Within the Beauty Care business unit, our focused portfolio of brands with unique, distinct brand equi- ties forms the basis for leading, consumer-relevant innovations in our Branded Consumer Goods and Hair Salon businesses. We develop new products and launch strategies with as much global synergy as is possible, while implementing them as locally as is necessary. Through our customer and consumer proximity, we are able to identify global trends at an early stage and quickly respond to these on an indi- vidual basis with innovative products. In consumer marketing, advancing digitalization alongside classic advertising and point-of-sale activities enables a sig- nificant increase in media efficiency. With personal- ized 1:1 experiences, we target the right consumer group with the right message in the right environ- ment, while also accelerating efficient re-targeting. We not only specifically choose which consumers we communicate with and by what means, but also which sales channels are of strategic relevance for us. We leverage our category leadership positions both in brick-and-mortar retail and in the field of eCommerce, also adding value for our online customers through our shopper knowledge and our expertise. Having hosted more than 300 customer visits in our Beauty Care Lighthouse, which opened in Düsseldorf in 2012, we have been able to consistently intensify our customer focus. The Lighthouse was thoroughly revamped in 2016 and now offers our customers from around the world an interactive experience of all our beauty competences with stronger focus on digitalization. In North America and Asia, we have rolled out the new Henkel Adhesives eShop for our industrial cus- tomers. This modern eCommerce platform builds on a holistic and customer-centric concept, offering a We are also committed in our Hair Salon business to close partnership and cooperation with our custom- ers. With our globally established Schwarzkopf Acad- emies, we offer value-adding services in the form of Henkel Annual Report 2017 Combined management report 91 domain. Moreover, the credible implementation of our sustainability strategy strengthens both our brands and the reputation of our company in the marketplace. With decades of experience in aligning our activities to sustainable development, we are able to position ourselves as a leader in the field and as a partner able to offer our customers future-capable solutions. We cooperate closely with our customers in trade and industry in the development and implementation of viable concepts. state-of-the-art seminars and ongoing further train- ing opportunities, with the focus on the professional hairdresser’s role as an entrepreneur. In the Laundry & Home Care business unit, we develop our marketing strategies and product inno- vations for our strong brands on a global scale, adapt- ing them to regional consumer needs and market conditions, and implementing them at the local level. In doing so, we ensure central, efficient man- agement of our brands aimed at strengthening their cores and offering consumers emotional added value instead of just functional benefits. We focus on an innovation process that enables us to both recognize global consumer trends early on and implement new products quickly, while at the same time remaining closely attuned to local needs. We also use new technologies – such as the Internet of Things – to steadily enhance our brands. Digital trends are likewise incorporated in our brand com- munication activities; we are steadily expanding the use of digital media – particularly social media – to engage our consumers in the most effective way possible. Laundry & Home Care implements a 360 Degree Cus- tomer Collaboration concept to develop its customer relationships in as many directions as possible – in both brick-and-mortar retail and the field of eCommerce. Our Global Experience Center opened in Düsseldorf in 2015 to further strengthen our partner- ships with our customers. This innovative platform showcases the latest trends, products and sustain- ability concepts in the field of Laundry & Home Care, allowing the more than 200 customers who have already visited the Center to explore them with all their senses. On the basis of the latest consumer analyses and shopper marketing surveys, we develop customized solutions to meet the specific require- ments of our partners and identify common areas of potential value creation. The Global Experience Cen- ter was extended in 2017 to include an interactive digitalization and eCommerce station. The importance of sustainability in our relationships with customers and consumers continues to grow in all three business units. Our customers expect their suppliers to ensure compliance with global environ- mental, safety, and social standards. Our standards and management systems, our many years of experi- ence in sustainability reporting, and excellent appraisals by external rating agencies all help us to convince our audience of our credentials in this 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB])096 Risks and opportunities report104 Forecast 92 Combined management report Henkel Annual Report 2017 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) * The annual financial statements of Henkel AG & Co. KGaA have been prepared in accordance with the rules and regulations of the German Commercial Code [HGB] and the German Stock Corporation Act [AktG]. Deviations from the International Financial Reporting Standards (IFRSs) applicable to the Group arise particularly with respect to the methods of recognition and measurement of intangible assets, financial instruments and provisions. Operational activities Henkel AG & Co. KGaA is operationally active in the three business units Adhesive Technologies, Beauty Care and Laundry & Home Care, as well as being the parent company of the Henkel Group. As such it is responsible for defining and pursuing Henkel’s cor- porate objectives and also for the management, control and monitoring of Group-wide activities, including risk management and the allocation of resources. As of year-end 2017, some 7,900 people were employed at Henkel AG & Co. KGaA. The operating business of Henkel AG & Co. KGaA represents only a portion of the business activity of the entire Henkel Group and is managed across the Group by the business units, particularly on the basis of the performance indicators: organic sales growth, adjusted return on sales (EBIT) and adjusted earnings per preferred share. Only the Group approach can provide complete insight into these key financials (see the discussion of the management system and performance indicators applicable to the Henkel Group on page 63). The net assets, financial position and results of opera- tions of Henkel AG & Co. KGaA are influenced both by its own operating activity and by the operating activity of its subsidiaries on the basis of their dividend * The full financial statements of Henkel AG & Co. KGaA with the auditor’s unqualified opinion are filed with the commercial register and accessible on the internet at www.henkel.com/reports. distributions. Thus the financial situation of Henkel AG & Co. KGaA generally corresponds to that of the Group as a whole, which is discussed in the section “Review of overall business performance” on page 66. Results of operations Sales and profits 2017 was a good year for Henkel AG & Co. KGaA. At 3,637 million euros, sales of Henkel AG & Co. KGaA in 2017 were 1.1 percent lower year on year. This result is consistent with our guidance for 2017. The substantial improvement in financial result enabled Henkel AG & Co. KGaA to exceed its forecast of flat to slightly higher unappropriated profit. The improved financial result was mainly attributable to higher dividend income from subsidiaries. In fiscal 2017, the Adhesive Technologies business unit generated sales of 1,019 million euros, slightly below the figure of the previous year. Declining sales in the Adhesives for Consumers, Craftsmen and Building business area, primarily as a result of selling the professional Western European building material business, were extensively compensated by the per- formance of the Industrial Adhesives businesses. The Beauty Care business unit achieved sales of 520 million euros in 2017. The decrease year on year was mainly due to fiercer competitive and price pressures. The Laundry & Home Care business unit generated sales of 940 million euros in 2017, thus exceeding the figure for 2016. Domestic sales performance in Germany was a major factor in this positive perfor- mance. Henkel Annual Report 2017 Combined management report 93 Condensed income statement in accordance with the German Commercial Code [HGB] 72 2017 3,637 – 2,595 1,042 – 803 – 311 193 121 1,070 1,191 – 85 1,106 330 1,436 2016 3,676 – 2,444 1,232 – 911 – 312 154 163 911 1,074 – 179 895 133 1,028 Expenditures for research and development decreased in the reporting period by 1 million euros to 311 million euros. The proportion of sales was therefore unchanged compared to 2016 (8.5 percent). Restructuring expenses of 31 million euros, included in the expense items mentioned, were lower compared to 2016 (33 million euros). Other operating income / expenses Other operating result increased in 2017 versus prior year by 39 million euros. Year on year, other operating income increased by 31 million euros to 278 million euros, mainly as a result of the sale of the professional Western European building material business. Other operating expenses in 2017 were 8 million euros less than the prior-year figure of 93 million euros. The higher expenses in 2016 were mainly due to project expenses relating to other periods that were recharged by a subsidiary of Henkel AG & Co. KGaA. in million euros Sales Cost of sales Gross profit Marketing, selling, distribution and administrative expenses Research and development expenses Other operating income / expenses Operating profit Financial result Income before tax Taxes on income Net income Profit brought forward Unappropriated profit Sales in the Corporate segment decreased from 1,176 million euros in 2016 to 1,158 million euros in 2017. For the first time in 2017, intra-group income from costs recharged amounting to 104 million euros (2016: 94 million euros) was offset against selling and distribution expenses in the same amount in order to improve the transparency of the result of operations. The operating profit of Henkel AG & Co. KGaA decreased by 42 million euros to 121 million euros, mainly as a result of higher raw material prices. Certain results such as an improvement in other operating income had a partially countervailing effect. Expense items Compared to 2016, cost of sales increased by 151 mil- lion euros to 2,595 million euros, mainly as a result of higher raw material prices and increased royalties and licensing fees paid to affiliated companies. Gross margin decreased by 4.8 percentage points to 28.7 percent. At 571 million euros, marketing, selling and distribu- tion expenses were below the prior-year figure of 678 million euros. For the first time in 2017, intra- group selling and distribution expenses amounting to 104 million euros (2016: 94 million euros) were offset against income from costs recharged in the same amount in order to improve the transparency of the result of operations. The proportion of sales was 15.7 percent, which is below the level of 2016. Compared to 2016, the administrative costs attribut- able to the administrative functions decreased by 1 million euros to 232 million euros. Their ratio to sales increased by 0.1 percentage points to 6.4 percent. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report104 Forecast 94 Combined management report Henkel Annual Report 2017 Financial result Taxes on income The financial result increased from 911 million euros in 2016 to 1,070 million euros in 2017. In 2017, taxes on income amounted to –85 million euros following –179 million euros in 2016. The increase is substantially attributable to higher dividend income. The improved investment result was depleted to a degree by higher interest expenses resulting, partly, from the fixed-rate bond issued in June 2017. In addition, the interest expense in 2016 was lower due to the higher interest rate applicable to pension provisions. The interest rate for pension provisions was lower in 2017. Result for the year Net income amounted to 1,106 million euros and was therefore above the 2016 result of 895 million euros. The increase was mainly attributable to the improved financial result in 2017. Condensed balance sheet in accordance with the German Commercial Code [HGB] 73 in million euros Intangible assets and property, plant and equipment Financial assets Non-current assets Inventories Receivables and miscellaneous assets Marketable securities Liquid funds Current assets Deferred income Assets arising from the overfunding of pension obligations Total assets Equity Special accounts with reserve element Provisions Liabilities / deferred charges Total equity and liabilities December 31, 2016 December 31, 2017 1,045 11,032 12,077 13 3,335 4 485 3,837 19 392 16,325 6,406 94 781 9,044 16,325 1,032 13,365 14,397 14 1,963 4 84 2,065 28 419 16,909 6,823 84 712 9,290 16,909 Henkel Annual Report 2017 Combined management report 95 Net assets and financial position As of December 31, 2017, the total assets of Henkel AG & Co. KGaA increased compared to year-end 2016 by 584 million euros to 16,909 million euros. Non-current assets increased to 14,397 million euros, a rise of 2,320 million euros compared to 2016. The increase in financial assets is primarily due to our acquisitions and various capital measures involving affiliated companies. In addition, a loan was issued to a US subsidiary in 2017. Current assets decreased in 2017 from 3,837 million euros to 2,065 million euros, primarily as a result of lower current receivables from affiliated companies. At 419 million euros, overfunding from offsetting plan assets against pension obligations was higher year on year. Equity increased from 6,406 million euros to 6,823 million euros. Provisions decreased by 69 mil- lion euros to 712 million euros. The balance of pen- sion obligations and plan assets is reported in assets due to overfunding. For details of issued capital and treasury stock, please refer to the disclosures in the notes to the consolidated financial statements of Henkel AG & Co. KGaA. Liabilities and deferred charges rose in 2017 by a total of 246 million euros versus 2016, partly as a result of new borrowings that were used to fund our acquisitions. For an overview of the financing and capital management of Henkel AG & Co. KGaA, please refer to the informa- tion about the Henkel Group on pages 80 and 81. Risks and opportunities The business performance of Henkel AG & Co. KGaA is essentially subject to the same risks and opportu- nities as that of the Henkel Group. With respect to the risks of its subsidiaries, Henkel AG & Co. KGaA is generally exposed in proportion to its shareholding in each case. Due to the different discount rates for pension obli- gations under the German Commercial Code [HGB] and IFRS, the conclusion drawn from the risk assess- ment for the separate financial statements of Henkel AG & Co. KGaA differs from that of the Group. We assess the potential financial impact of this risk for Henkel AG & Co. KGaA as major. Additional information regarding risks and opportu- nities and the risk management system can be found on the following pages 96 to 103. Forecast The performance of Henkel AG & Co. KGaA in its function as an operating holding company is influ- enced primarily by the development and dividend distributions of the companies in which it has shareholdings. We expect sales in 2018 to be on a par with the figure for 2017. The positive performance reported for the Group also impacts Henkel AG & Co. KGaA through dividend payments from subsid- iaries. Assuming positive development of the finan- cial result, we expect the unappropriated profit generated in 2018 by Henkel AG & Co. KGaA to be flat or to increase slightly. This will enable our share- holders to participate to a reasonable extent in the Group’s net income, with retained earnings also available for utilization if necessary. The forecast for the Henkel Group can be found on pages 104 and 105. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report104 Forecast 96 Combined management report Henkel Annual Report 2017 Risks and opportunities report Risks and opportunities In the pursuit of our business activities, Henkel is exposed to multiple risks inherent in the global mar- ket economy. We deploy an array of effective moni- toring and control systems aligned to identifying risks at an early stage, evaluating the exposure, and introducing effective countermeasures. We have incorporated these instruments within a risk man- agement system as described below. Entrepreneurial activity also involves identifying and exploiting opportunities as means of securing and extending the corporation’s competitiveness. The reporting aspect of our risk management sys- tem, however, does not encompass entrepreneurial opportunities. Early and regular identification, anal- ysis and exploitation of opportunities are performed at the Group level and within the individual business units. This is a fundamental component of our strat- egy. We perform in-depth analysis of the markets and our competitors, and study the relevant cost variables and key success factors. Risk management system The risk management system at Henkel is integrated into the comprehensive planning, controlling, and reporting systems used in the subsidiaries, in the business units, and at Group level. Our early warning system and Internal Audit function are also import- ant components of our risk management system. Within the corporate governance framework, our internal control and compliance management sys- tems support our risk management capability. The risk reporting system encompasses the systematic identification, evaluation, documentation and com- munication of risks. We have defined the principles, processes and responsibilities relating to risk man- agement in a corporate standard that is binding on the Henkel Group. With the continuous development of our corporate standards and systems, we take into account updated findings. iaries, the business units, and the Group. Risk man- agement is thus performed with a holistic, integra- tive approach to the systematic handling of risks. We understand risks as potential future develop- ments or events that could lead to negative devia- tions from our guidance. Risks with a probability of occurrence of over 50 percent are taken into account in our guidance and short-term planning. As a rule, we estimate risks for the one-year forecast period. The annual risk reporting process begins with identifying material risks using checklists based on defined operating (for example procurement and production) and functional (for example information technology and human resources) risk categories. We evaluate the risks in a two-stage process accord- ing to the probability of occurrence and potential loss. Included in the risk report are risks with a loss potential of at least 1 million euros or 10 percent of the net external sales of a country, where the proba- bility of occurrence is considered greater than zero. The first step entails determining gross risk to the extent that this is possible. We then calculate the net risk, taking countermeasures into account. Initially, risks are compiled on a decentralized, per-country basis, with the assistance of regional coordinators. The locally collated risks are then analyzed by experts in the business units and corporate func- tions. In particular areas such as Corporate Treasury, risks are determined with the support of sensitivity analyses including value-at-risk computations. Risk analyses are then prepared for the respective execu- tive committees of the business units and corporate functions, and finally assigned to an area-specific risk inventory. The risk situation is subsequently reported to our Compliance & Risk Committee, the Management Board and the various supervising boards. Material unforeseen changes are reported immediately to the CFO and the Compliance & Risk Committee. Corporate Accounting is responsible for coordinating the overall process and analyzing the inventoried exposures. Within our risk strategy framework, the assumption of calculated risk is an intrinsic part of our business. However, risks that endanger the existence of the company must be avoided. When it is not possible to avoid these critical risks, they must be reduced or transferred, for example through insurance. Risks are controlled and monitored at the level of the subsid- The risk reporting process is supported by internet- based software which ensures transparent commu- nication throughout the entire Group. Our Internal Audit function regularly reviews the quality and efficiency of our risk management system. Within the framework of the 2017 audit of our annual financial statements, our external auditor examined Henkel Annual Report 2017 Combined management report 97 the structure and function of our risk early warn- ing system in accordance with Section 317 (4) German Commercial Code [HGB], and confirmed its compliance. The following describes the main features of the internal control and risk management system in relation to our accounting processes, in accordance with Section 315 (2) (5) HGB. Corresponding with the definition of our risk management system, the objec- tive of our accounting processes lies in the identifi- cation, evaluation and management of all risks that jeopardize the regulatory preparation of our annual and consolidated financial statements. Accordingly, the internal control system’s function is to imple- ment relevant principles, procedures and controls so as to ensure the financial statement closing process is regulatory compliant. Within the organization of the internal control system, the Management Board assumes overriding responsibility at Group level. The duly coordinated subsystems of the internal control system lie within the responsibility of the Corporate Accounting, Controlling, Corporate Trea- sury, Compliance and Regional Finance functions. Within these functions, there are a number of inte- grated monitoring and control levels. These are assessed by regular and comprehensive effectiveness tests performed by our Internal Audit function. Of the multifaceted control processes incorporated into the accounting process, several are important to highlight. The basis for all our accounting processes is pro- vided by our corporate standard “Accounting,” which contains detailed accounting and reporting instruc- tions covering all material circumstances, including clear procedures for inventory valuation or how transfer prices applicable for intra-group transac- tions should be determined. This corporate standard is binding on the entire Group and is regularly updated and approved by the CFO. The local Presi- dents and Heads of Finance of all consolidated sub- sidiaries must confirm their compliance with this corporate standard on an annual basis. Further globally binding procedural instructions affecting our accounting practice are contained in our corporate standards “Treasury” and “Invest- ments.” Through appropriate organizational mea- sures in conjunction with restrictive access to our information technology, we ensure segregation of duties in our accounting systems between trans- action entry on the one hand, and checking and approval on the other. Documentation relating to the operational accounting and closing processes ensures that important tasks – such as the recon- ciliation of receivables and payables on the basis of account balance confirmations – are clearly assigned. Additionally, binding authorization regula- tions exist governing the approval of contracts, credit notes and the like, with strict adherence to the prin- ciple of dual control as a mandatory requirement. This is also stipulated in our Group-wide corporate standards. The significant risks for Henkel and the corresponding controls with respect to the regulatory preparation of our annual and consolidated financial statements are collated in a central documentation pack. This documentation is reviewed and updated annually by the respective process owners. The established systems are also regularly reviewed to determine their improvement and optimization potential. We con- sider these systems to be appropriate and effective. The accounting activities for subsidiaries included in the consolidated financial statements are performed either locally by the subsidiary or through a shared service center, taking the aforementioned corporate standards into account. The individual subsidiaries’ financial statements are transferred to our central consolidation system and checked at corporate level for compliance and reliability. After all consolidation steps have been completed, the consolidated finan- cial statements are prepared by Corporate Account- ing in consultation with the specialist departments. Preparation of the combined management report is coordinated by Investor Relations in cooperation with each business unit and corporate function. The Management Board then compiles the consolidated financial statements and annual financial state- ments of Henkel AG & Co. KGaA, and the combined management report for Henkel AG & Co. KGaA and the Group, and subsequently presents these docu- ments to the Supervisory Board for approval. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report104 Forecast 98 Combined management report Henkel Annual Report 2017 Overview of major risk categories Risk category Operating risks Procurement market risks Production risks Probability Low Moderate Macroeconomic and sector-specific risks High Functional risks Financial risks Credit risk Liquidity risk Currency risk Interest rate risk Risks from pension obligations Legal risks IT risks Personnel risks Risks in connection with brand image or reputation of the company Environmental and safety risks Business strategy risks Low Low High High High Low Low Moderate Low Low Moderate 74 Potential financial impact Major Major Major Major Minor Major Minor Minor Major Major Moderate Major Major Moderate Classification of risks in ascending order 75 Probability Low Moderate High Potential financial impact Minor Moderate Major 1–9 % 10–24 % ≥ 25 % 1–49 million euros 50–99 million euros ≥ 100 million euros Major risk categories Risks are presented from a net perspective, i.e. with their respective mitigation measures taken into account. Operating risks Procurement market risks Description of risk: We expect prices for direct materials in our procurement markets to increase moderately overall in 2018 compared to 2017. This increase will be driven primarily by higher antici- pated prices for input materials, and especially crude oil and petrochemicals. However, due to geopolitical, global economic, and climatic uncertainties, we expect prices to fluctuate in the course of the year. This may lead to raw material price trends that are unfavorable for Henkel but cannot always be passed on in full. We therefore see risks arising beyond the forecasted moderate increase in relation to import- ant raw materials and packaging materials. The segments in the industrial goods sector are affected to a greater extent by these price risks than the individual segments in the consumer goods sec- tor. Additional price and supply risks exist due to possible demand- or production-related shortages in the procurement markets. Furthermore, continued major volatility can be expected from global eco- nomic, geopolitical and climate risks, which could lead to rising material prices and supply shortages. Measures: The measures taken include active sup- plier portfolio management through our globally engaged, cross-divisional sourcing capability, together with strategies aimed at securing price and volume both through contracts and, where appropri- ate and possible, through financial hedging instru- ments. Furthermore, we work in interdisciplinary teams within Research and Development, Supply Chain Management and Purchasing on devising alternative formulations and packaging forms so as to be able to respond flexibly to unforeseen fluctua- tions in raw material prices. We also avoid becoming dependent on individual suppliers to better secure the constant supply of the goods and services that we require. Finally, close collaboration with our strate- gic suppliers plays an exceptionally important role in our risk management. Further details regarding the assessment of supplier financial stability can be found in the section on “Procurement” on pages 84 Henkel Annual Report 2017 Combined management report 99 and 85. The basis for our risk management approach is provided by a comprehensive procurement infor- mation system aimed at ensuring permanent trans- parency with respect to our purchasing volumes. Impact: Low probability rating, possible major impact on our earnings guidance. Production risks Description of risk: Henkel faces production risks in the event of low capacity utilization due to vol- ume decreases and unplanned operational interrup- tions, especially at our single-source sites. Measures: We can offset the negative effects of pos- sible production outages through flexible production control and, where economically viable, insurance policies. Such production risks are minimized by ensuring high employee qualification, clearly defined safety standards, and regular plant and equipment maintenance. Capital expenditure decisions on property, plant and equipment are made in accor- dance with defined, differentiated responsibility procedures and approval processes. They incorporate all relevant specialist functions and are regulated in an internal corporate standard. Investments are ana- lyzed in advance on the basis of detailed risk aspects. Further audits accompanying projects provide the foundation for project management and risk reduction. Impact: Moderate probability rating, possible major impact on our earnings guidance. Macroeconomic and sector-specific risks Description of risk: We remain exposed to macro- economic risks emanating from the uncertainties of the current geopolitical and economic environment. We currently see geopolitical risk arising in connec- tion with the increased number of conflict zones. A decline in the macroeconomic environment poses a risk to the industrial sector in particular. A downturn in consumer spending is relevant for the consumer goods segments. A further significant risk is posed by an increasingly competitive environment, as this could result in stronger price and promotional pres- sures in the consumer goods sector. As consolidation in the retail sector continues and private labels attract a growing share of the market, crowding-out competition in the consumer goods sector could intensify. The risk of product substitution inherent in this could, in principle, affect all business units. Technological change associated with digitalization may involve risks for the success of our products and processes. Measures: We focus on continuously strengthening our brands (see separate risk description on page 102) and consistently developing further innovations. We consider innovative products and processes to be a significant success factor for our company, enabling us to differentiate ourselves from the competition. We also pursue specific sales and marketing initia- tives, for example advertising and promotional activ- ities. Here, again, driving digitalization is of key importance. One example of this is the specific mar- keting of our products on a dedicated eCommerce platform for our industry customers (further details can be found in the section on marketing and distri- bution on pages 90 and 91). In addition, we have the capability to react quickly to potential sales declines through flexible production control. Impact: High probability rating, possible major impact on our sales and earnings guidance. Functional risks Financial risks Description of risk: Henkel is exposed to financial risk in the form of credit risks, liquidity risks, cur- rency risks, interest rate risks, and risks arising from pension obligations. For the description of credit risks, liquidity risks, currency risks and interest rate risks, please refer to the notes to the consolidated financial statements on pages 156 to 161. For the risks arising from our pension obligations, please see pages 141 to 143. Measures: Risk-mitigating measures and the man- agement of these risks are also described in the notes to the consolidated financial statements on the pages mentioned. Impact: We classify financial risks as follows: • Credit risk with a low probability of a major impact on our earnings guidance • Liquidity risk with a low probability of a minor impact on our earnings guidance • Currency risk with a high probability of a major impact on our earnings guidance • Interest rate risk with a high probability of a minor impact on our earnings guidance • Risks arising from our pension obligations with a high probability of a minor impact on our earnings guidance, and with a moderate probability of a major impact on our equity 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report104 Forecast 100 Combined management report Henkel Annual Report 2017 Legal and regulatory risks Description of risk: As a globally active corporation we are exposed, in the course of our ordinary busi- ness activities, to a range of risks relating to litiga- tions and other actions, including government agency proceedings in which we are currently involved or may become involved in the future. These risks arise, in particular, in the fields of prod- uct liability, product deficiency, competition and cartel law, infringement of proprietary rights, patent law, tax law, environmental protection and legacy remediation. We cannot rule out the likelihood of negative rulings on current litigations and further litigations being initiated in the future. Legal uncer- tainty in some regions could also limit our ability to assert our rights. Our business is subject to various national rules and regulations and – within the European Union (EU) – increasingly to harmonized laws applicable through- out the EU. In addition, some of our operations are subject to rules and regulations derived from approv- als, licenses, certificates or permits. Our manufactur- ing operations are bound by rules and regulations with respect to the registration, evaluation, usage, storage, transportation and handling of certain sub- stances and also in relation to emissions, wastewater, effluent and other waste. The construction and operation of production facilities and other plant and infrastructure are governed by framework rules and regulations, including those relating to legacy remediation. Product-specific regulations of relevance to us relate in particular to ingredients and input materials, safety in manufacturing, the handling of products and their contents, and the packaging and marketing of these items. The control mechanisms include statutory material-related regulations, usage prohibitions or restrictions, procedural requirements (test and inspection, identification marking, provision of warning labels, etc.), and product liability law. Violation of such regulations may lead to legal proceedings or compromise our future business activities. Amendments to the aforementioned regulations and further changes to the regulatory environment in our relevant markets could influence our business activi- ties and thus adversely affect our assets, financial position and results of operations. Such changes might involve import and export controls, customs or other trade regulations, or pricing and foreign exchange restrictions. Equally, as a globally active company, we maintain business relations with customers in countries that are subject to export control legislation, embargoes, economic sanctions or other forms of trade restriction. Changes to these regulations, new or extended sanc- tions, or corresponding initiatives by institutional investors or non-governmental organizations may result in restrictions being imposed on our business activities in these countries or, indirectly, in other countries, or may prevent us from acquiring or keep- ing customers and suppliers. Measures: Our internal standards, guidelines, codes of conduct, and training measures are geared to ensur- ing compliance with the aforementioned statutory requirements and, for example, safeguarding our manufacturing facilities and products. These require- ments have also been incorporated into our manage- ment systems and are regularly audited. This includes the early monitoring and evaluation of relevant statu- tory and regulatory requirements and changes. Ensuring compliance with laws and regulations is an integral component of our business processes. This includes the early monitoring and evaluation of relevant statutory and regulatory requirements and changes. Henkel has further established a Group- wide compliance organization with locally and regionally responsible compliance officers led by a globally responsible General Counsel & Chief Com- pliance Officer (details can be found in the corporate governance report on pages 35 to 46). In addition, our corporate legal department maintains constant con- tact with local counsel. Current proceedings and potential risks are recorded in a separate reporting system. For certain legal risks, we have concluded insurance policies that are standard for the industry and that we consider to be appropriate. However, the outcome of proceedings is inherently difficult to foresee, especially in cases in which the claimant is seeking substantial or unspecified damages. In view of this, we are unable to predict what obligations may arise from such litigations. Consequently, major losses may result from litigations and proceedings that are not covered by our insurance policies or pro- visions. Potential damage to our reputation is not covered by insurance, nor is there any guarantee that Henkel will acquire adequate insurance cover at reasonable terms and conditions in future. Impact: Low probability rating, possible major impact on our earnings guidance. Henkel Annual Report 2017 Combined management report 101 Information technology risks Description of risk: Information technology has strategic significance for Henkel. Our business pro- cesses rely to a great extent on internal and external IT services, applications, networks, and infrastruc- ture systems. The failure or disruption of critical IT services and the manipulation or loss of data consti- tute material risks for Henkel. The failure of com- puter networks or disruption of important IT appli- cations can impair critical business processes. The loss of confidential data, for example formulations, customer information or price lists, could put us at a disadvantage vis-à-vis our competitors. Henkel’s reputation could also be damaged by such loss. Measures: The technical and organizational safe- guards for protecting information at Henkel are based on the international standards ISO 27001 and 27002. Major components include the classification of information, business processes, IT applications, and IT infrastructure safeguards with respect to con- fidentiality, availability, integrity and data protection requirements, as well as measures for avoiding risk. In addition, Henkel has put technical and organiza- tional measures in place to prevent, discover and defeat cyber attacks. As a member of Cyber Security Sharing and Analytics (CSSA) e.V., Henkel also main- tains regular contact with other major corporations to enable the early detection of threats and imple- mentation of effective countermeasures. Our critical business processes operate through redundantly configured systems designed for high availability. Our data backup procedures reflect best engineering practice. We regularly review our restore and disaster recovery processes. We develop our sys- tems using proven project management and program modification procedures. We inform and instruct our employees in the proper and secure use of information systems as part of their regular duties. The implementation of our security measures is continually reviewed by our Internal Audit function, other internal departments, and independent third parties. Impact: Low probability rating, possible major impact on our earnings guidance. Personnel risks Description of risk: The motivation and the qualifi- cation of our employees are key drivers of Henkel’s business success. Therefore, it is strategically import- ant to attract highly qualified professionals and executives and ensure they stay with the company. In selecting and employing talent, we compete globally for qualified professionals and executives. In many of our markets, we see clear signs of increasingly tough competition for the most talented professionals and the impacts of demographic change. These developments expose us to the risk of losing valuable employees or of being unable to recruit relevant qualified professionals and executives. Measures: We combat the risk of losing valuable employees through specifically devised personnel development programs and incentive systems. Supporting this is an established, thorough annual review process from which we derive individually tailored and future-viable qualification programs as well as performance-related remuneration systems. Further areas of our HR management focus include a global health management system and support for flexible work models to ensure better work-life flexibility. Access to buildings and areas containing IT systems, access to computer networks and applications, as well as user authorizations for our information sys- tems, are strictly limited to the minimum level nec- essary. For critical business processes, the required segregation of duties is enforced by technological means. We reduce the risk of not being able to recruit qualified professionals and executives by expanding our employer branding initiatives and through targeted cooperation with colleges and universities in all regions where we conduct business. Our attractive- ness as an employer is reinforced by our focus on pro- moting talent and specialized development programs. Our networks are protected against unauthorized external access where economically viable. Operat- ing systems and anti-virus software are automati- cally updated to their latest version on a continual basis. Further information relating to our employees can be found on pages 82 and 83. Impact: Moderate probability rating, possible moderate impact on our earnings guidance. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report104 Forecast 102 Combined management report Henkel Annual Report 2017 Business strategy risks Description of risk: Business strategy risks can arise from our expectations for internal projects, acquisi- tions and strategic alliances failing to materialize. The associated capital expenditures may not generate the originally anticipated value added due to internal or external influences. Individual projects could also be delayed or even halted by unforeseen events. Measures: We combat these risks through compre- hensive project management. We limit exposure through financial viability assessments in the review, decision, and implementation phases. These assess- ments are performed by specialist departments, assisted by external consultants where appropriate. Project transparency and control are supported by our management systems. Impact: Moderate probability rating, possible moderate impact on our earnings guidance. Risks in connection with the brand image or reputation of the company Description of risk: As a globally active corporation, Henkel is exposed to potential damage to its image in the event of negative reports in the media – including social media – regarding Henkel’s corpo- rate brand or individual product brands, particularly in the consumer goods sector. These could lead to a negative impact on sales. Measures: We minimize these risks through the measures described under legal and regulatory risks (see page 100). These are designed to ensure that our production facilities and products are safe. We also pursue a policy of pro-active public relations man- agement that serves to reinforce the reputation of our corporate brand and individual product brands. These measures are supported by a global communi- cation network, and international and local crisis management systems with regular training sessions and crisis response planning. Impact: Low probability rating, possible major impact on our sales and earnings guidance. Environmental and safety risks Description of risk: Henkel is a global manufactur- ing corporation and is therefore exposed to risks per- taining to the environment, safety, health, and social standards, manifesting in the form of personal injury, physical damage to goods, and reputational damage. Soil contamination and the associated remediation expense, as well as leakage or other technical failures, could give rise to direct costs for the corporation. Furthermore, indirect costs such as fines, claims for compensation or reputational dam- age may also be incurred. Measures: We minimize these risks through the measures described under legal and regulatory risks (see page 100), and through our auditing, advisory and training activities. We continually update these preventive measures in order to properly safeguard our facilities, assets and reputation. We ensure com- pliance with high technical standards, rules of con- duct, and relevant statutory requirements as a fur- ther means of preserving our assets, and make sure that our corporate values – one of which is sustain- ability – are put into practice. Impact: Low probability rating, possible major impact on our earnings guidance. Henkel Annual Report 2017 Combined management report 103 Major opportunity categories Entrepreneurial opportunities are identified and evaluated at Group level and in the individual busi- ness units, and duly incorporated into the strategy and planning processes. We understand the opportu- nities presented in the following as potential future developments or events that could lead to a positive deviation from our guidance. We also assess the probabilities of price-related procurement market and financial opportunities. Procurement market opportunities Description of opportunities: Countervailing the procurement market risks listed on pages 98 and 99, opportunities may also arise in which the influencing factors described in this section develop in a direction that is advantageous to Henkel. Impact: Low probability rating, possible major impact on our earnings guidance. Macroeconomic and sector-specific opportunities Description of opportunities: Additional business opportunities would arise if the uncertain geopolitical and macroeconomic situation in some regions, or the economic conditions in individual sectors, develop substantially better than expected. Impact: The opportunities described could have a major impact on our sales and earnings guidance. Financial opportunities Description of opportunities: Countervailing the currency and interest rate risks indicated under financial risks, and the risks arising from pension obligations as described on page 99, opportunities may also arise in which the influencing factors described in this section develop in a direction that is advantageous to Henkel. Impact: We classify financial opportunities as follows: • Currency opportunities with a moderate probabil- ity of a major impact on our earnings guidance • Interest rate opportunities with a moderate proba- bility of a moderate impact on our earnings guidance • Opportunities arising from our pension obliga- tions with a low probability of a minor impact on our earnings guidance, and with a moderate proba- bility of a major impact on our equity Acquisition opportunities Description of opportunities: Acquisitions are a key component of our strategy. Impact: Large acquisitions could have a major impact on our earnings guidance. Research and development opportunities Description of opportunities: Opportunities arising from our extensively continuous innovation process are a key component of our strategy and are already accounted for in our guidance. There are additional opportunities in the event of product introductions that exceed our expectations of market acceptance, and in the development of exceptional innovations that have not yet been taken into account. Impact: Innovations arising from future research and development could have a major impact on our sales and earnings guidance. Risks and opportunities in summary At the time this report was prepared, there were no identifiable risks related to future developments that could endanger the existence either of Henkel AG & Co. KGaA, or a material subsidiary included in the consolidation, or the Group, as a going concern. As we have no special-purpose vehicles, there is no risk that might originate from such a source. Compared to the previous year, our expectation of the likelihood and / or of the possible financial impact of individual risk and opportunity categories has changed slightly. Overall, however, the risk and opportunities situation has not altered to any signifi- cant degree. The system of risk categorization adopted by Henkel continues to indicate that the most significant expo- sure currently relates to the impact of macroeconomic and sector uncertainty together with financial risks, to which we are responding with the countermeasures described above. The Management Board remains confident that the earning power of the Group forms a solid foundation for future business development and provides the necessary resources to leverage our opportunities. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report104 Forecast 104 Combined management report Henkel Annual Report 2017 Forecast Macroeconomic development The assessment of future world economic develop- ment is based on information provided by IHS Markit. Direct materials: increase in price levels We expect prices for raw materials, packaging and purchased goods and services to increase moderately compared to the previous year. Currencies: continued high volatility We anticipate continued high volatility in the cur- rency markets. We expect a weaker average US dollar rate for 2018 compared to 2017. In addition, some major currencies in the emerging markets could weaken. Development by sector Consumption and retail: growth of approximately 3 percent IHS expects that global private consumption will increase by approximately 3 percent overall in 2018. For the mature markets, IHS anticipates growth of approximately 2 percent. Private spending in the emerging markets is expected to grow by around 4 percent. Industrial production index: growth of approximately 3.5 percent Year on year, IHS expects the industrial production index (IPX) to gain approximately 3.5 percent world- wide. Industrial production should therefore grow at a slightly faster pace than the economy as a whole. Industrial production is expected to grow by approx- imately 3 percent in the mature markets and by approximately 4 percent in the emerging markets. Overview: moderate gross domestic product growth of around 3 percent Global economic growth is expected to remain only moderate in 2018. IHS expects gross domestic prod- uct to rise by around 3 percent. The mature markets should grow by around 2 percent. The North American economy is expected to grow by approximately 2.5 percent, while Japan’s economy is forecasted to expand by approximately 1 percent. For Western Europe, IHS anticipates growth of approxi- mately 2 percent. The emerging markets are forecasted to achieve robust economic growth of approximately 5 percent in 2018, but developments are expected to vary between individual regions and countries. Asia (excluding Japan) is expected to increase its economic output by around 6 percent. An increase of approxi- mately 3 percent is forecasted for the Africa / Middle East and Eastern Europe regions. IHS expects posi- tive performance of approximately 1.5 percent in Latin America in 2018. Inflation: global inflation rate up year on year Global inflation is expected to increase versus prior year to a rate of approximately 5 percent. IHS expects the mature markets to continue exhibiting a high degree of price stability, with inflation holding at around 2 percent. Inflation of approximately 10 percent on average is forecasted for the emerging markets. This significant increase compared to the previous year is primarily due to the inflation expectations for Venezuela. Henkel Annual Report 2017 Combined management report 105 Furthermore, we have the following expectations for 2018: • Restructuring expenses of 200 to 250 million euros • Investments in property, plant and equipment and intangible assets of between 750 and 850 million euros Dividend In accordance with our dividend policy and depending on the company’s asset and profit positions as well as its financial requirements, we expect a dividend payout by Henkel AG & Co. KGaA in the range of 25 percent to 35 percent of net income after non-con- trolling interests, and adjusted for exceptional items. Capital expenditures In fiscal 2018, we plan to increase our investments in property, plant and equipment and intangible assets to approximately 750 to 850 million euros. We intend to allocate our budget to expanding our businesses in emerging markets and mature markets in approxi- mately equal proportions. In line with our strategic priorities, considerable investments are planned in strengthening our innovation capabilities, and in expanding and further streamlining our production and logistics. Targeted investments in IT infrastruc- ture will drive the digitalization of our processes. Outlook for the Henkel Group in 2018 We expect the Henkel Group to generate organic sales growth of 2 to 4 percent in fiscal 2018. Our expectation is that each business unit will generate organic sales growth within this range. The starting point for our expected organic sales growth is our strong competitive position. We have consolidated and further developed this in recent years through our innovative strength, strong brands and leading market positions, as well as the quality of our portfolio. We expect the contribution to the nominal sales growth of the Henkel Group from our acquisitions in 2017 to be in the low single-digit percentage range. The translation of sales in foreign currencies is expected to have a negative effect. In recent years we have introduced a number of measures that have had a positive effect on our cost structure. Again this year, we intend to continue adapting our structures to constantly changing mar- ket conditions and to maintain our strict cost discip- line. Through optimization and standardization of processes, we can further improve our efficiency while simultaneously enhancing the quality of our customer service. Moreover, the optimization of our production and logistics networks will contribute to improving our cost structures. These factors, together with the expected increase in sales, will have a positive effect on our earnings per- formance. For adjusted 1 return on sales (EBIT), we anticipate an increase year on year to more than 17.5 percent. All three business units are expected to contribute to this positive performance. We anticipate an increase in adjusted earnings per preferred share of between 5 and 8 percent. The bandwidth for our guidance in respect of growth in adjusted earnings per preferred share reflects particularly the uncertainty prevailing on the currency markets, especially with regard to the development of the US dollar. 1 Adjusted for one-time charges / gains and restructuring expenses. 59 Fundamental principles of the Group65 Economic report92 Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) 96 Risks and opportunities report104 Forecast 106 Consolidated financial statements Henkel Annual Report 2017 Consolidated financial statements 108 Consolidated statement of 125 Notes to the consolidated financial statements – Notes to the consolidated statement of financial position 125 Intangible assets 129 Property, plant and equipment 131 Other financial assets 131 Other assets 132 Deferred taxes 132 Inventories 132 Trade accounts receivable 133 Cash and cash equivalents 133 Assets and liabilities held for sale 133 Issued capital 134 Capital reserve 134 Retained earnings 135 Other components of equity 135 Non-controlling interests 135 Provisions for pensions and similar obligations 144 Income tax provisions and other provisions 146 Borrowings 147 Other financial liabilities 148 Other liabilities 148 Trade accounts payable 149 Financial instruments report financial position 110 Consolidated statement of income 110 Consolidated statement of comprehensive income 111 Consolidated statement of changes in equity 112 Consolidated statement of cash flows 113 Notes to the consolidated financial statements – Group segment report by business unit 114 Notes to the consolidated financial statements – Key financials by region 115 Notes to the consolidated financial statements – Accounting principles and methods applied in preparation of the consolidated financial statements Henkel Annual Report 2017 Consolidated financial statements 107 175 Notes to the consolidated financial statements – Subsequent events 176 Independent Auditor’s Report 182 Recommendation for the approval of the annual financial statements and the appropriation of the profit of Henkel AG & Co. KGaA 183 Responsibility statement by the Personally Liable Partner 184 Corporate bodies of Henkel AG & Co. KGaA 162 Notes to the consolidated financial statements – Notes to the consolidated statement of income 162 Sales and principles of income recognition 162 Cost of sales 162 Marketing, selling and distribution expenses 162 Research and development expenses 162 Administrative expenses 163 Other operating income 163 Other operating expenses 163 Financial result 164 Taxes on income 166 Non-controlling interests 167 Notes to the consolidated financial statements – Other disclosures 167 Reconciliation of adjusted net income 167 Payroll cost and employee structure 168 Share-based payment plans 169 Group segment report 171 Earnings per share 171 Consolidated statement of cash flows 173 Contingent liabilities 173 Lease and other unrecognized financial commitments 173 Voting rights / Related party disclosures 174 Exercise of exemption options 174 Remuneration of the corporate bodies 174 Declaration of compliance with the Corporate Governance Code [DCGK] 175 Subsidiaries and other investments 175 Auditor’s fees and services s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o C 108 Consolidated financial statements Henkel Annual Report 2017 Consolidated statement of financial position Assets in million euros Intangible assets Property, plant and equipment Other financial assets Income tax refund claims Other assets Deferred tax assets Non-current assets Inventories Trade accounts receivable Other financial assets Income tax refund claims Other assets Cash and cash equivalents Assets held for sale Current assets Total assets Note 1 2 3 4 5 6 7 3 4 8 9 2016 15,564 1 2,887 95 7 155 1,030 1 19,738 1,938 3,349 734 274 434 1,389 95 8,213 % 55.7 10.3 0.3 – 0.6 3.7 70.6 6.9 12.0 2.6 1.0 1.6 5.0 0.3 2017 15,653 3,005 50 8 169 949 19,834 2,080 3,544 1,072 329 451 916 81 29.4 8,473 76 % 55.3 10.6 0.2 – 0.6 3.4 70.1 7.3 12.5 3.8 1.2 1.6 3.2 0.3 29.9 27,951 100.0 28,307 100.0 1 Adjusted following the final allocation of the purchase price for the acquisition of The Sun Products Corporation, which resulted in an increase of 21 million euros in intangible assets and an increase of 13 million euros in deferred tax assets. Henkel Annual Report 2017 Consolidated financial statements 109 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Equity and liabilities in million euros Issued capital Capital reserve Treasury shares Retained earnings Other components of equity Equity attributable to shareholders of Henkel AG & Co. KGaA Non-controlling interests Equity Provisions for pensions and similar obligations Income tax provisions Other provisions Borrowings Other financial liabilities Other liabilities Deferred tax liabilities Non-current liabilities Income tax provisions Other provisions Borrowings Trade accounts payable Other financial liabilities Other liabilities Income tax liabilities Liabilities held for sale Current liabilities Note 10 11 12 13 14 15 16 16 17 18 19 5 16 16 17 20 18 19 9 2016 438 652 – 91 14,236 1 – 188 15,047 138 15,185 1,007 106 347 3,300 146 1 25 833 5,764 358 1,966 425 3,665 164 395 16 13 7,002 % 1.6 2.3 – 0.3 50.9 – 0.7 53.8 0.5 54.3 3.6 0.4 1.2 11.8 0.5 0.1 3.0 20.6 1.3 7.0 1.5 13.1 0.6 1.5 0.1 – 25.1 2017 438 652 – 91 16,104 – 1,527 15,576 74 15,650 760 27 338 3,076 85 17 617 4,920 437 1,756 1,268 3,717 214 340 5 – 7,737 77 % 1.5 2.3 – 0.3 56.9 – 5.4 55.0 0.3 55.3 2.7 0.1 1.2 10.8 0.3 0.1 2.2 17.4 1.5 6.2 4.5 13.1 0.8 1.2 – – 27.3 Total equity and liabilities 27,951 100.0 28,307 100.0 1 Adjusted following the final allocation of the purchase price for the acquisition of The Sun Products Corporation, which resulted in an increase of 2 million euros in retained earnings and an increase of 32 million euros in other financial liabilities. 110 Consolidated financial statements Henkel Annual Report 2017 Consolidated statement of income in million euros Sales Cost of sales Gross profit Marketing, selling and distribution expenses Research and development expenses Administrative expenses Other operating income Other operating expenses Operating profit (EBIT) Interest income Interest expense Other financial result Investment result Financial result Income before tax Taxes on income Tax rate in % Net income Attributable to non-controlling interests Attributable to shareholders of Henkel AG & Co. KGaA Earnings per ordinary share – basic and diluted in euros Earnings per preferred share – basic and diluted in euros Note 2016 % 2017 % 22 23 24 25 26 27 28 29 30 31 18,714 – 9,742 8,972 – 4,635 – 463 – 1,062 109 – 146 2,775 20 – 25 – 26 – 2 – 33 2,742 – 649 23.7 2,093 40 2,053 4.72 4.74 100.0 20,029 – 52.1 – 10,680 47.9 9,349 – 24.7 – 4,876 – 2.5 – 5.7 0.6 – 0.8 14.8 0.1 – 0.1 – 0.2 – – 0.2 14.6 – 3.4 11.2 0.2 11.0 – 476 – 980 129 – 91 3,055 18 – 55 – 10 – 4 – 51 3,004 – 463 15.4 2,541 22 2,519 5.79 5.81 100.0 – 53.3 46.7 – 24.3 – 2.4 – 4.8 0.6 – 0.5 15.3 0.1 – 0.3 – 0.1 – – 0.3 15.0 – 2.3 12.7 0.1 12.6 78 +/– 7.0 % 9.6 % 4.2 % 5.2 % 2.8 % – 7.7 % 18.3 % – 37.7 % 10.1 % – 10.0 % – – 61.5 % 100.0 % 54.5 % 9.6 % – 28.7 % 21.4 % – 45.0 % 22.7 % 22.7 % 22.6 % Consolidated statement of comprehensive income See Notes 15 and 21 for further explanatory information in million euros Net income Components to be reclassified to income: Exchange differences on translation of foreign operations Gains / losses from derivative financial instruments (Hedge reserve per IAS 39) Gains / losses from financial instruments in the available-for-sale category (Available-for-sale reserve) Components not to be reclassified to income: Remeasurement of net liability from defined benefit pension plans (net of taxes) Other comprehensive income (net of taxes) Total comprehensive income for the period Attributable to non-controlling interests Attributable to shareholders of Henkel AG & Co. KGaA 79 2017 2,541 2016 2,093 141 – 1,334 – – – 138 3 2,096 47 2,049 – 14 – 124 – 1,224 1,317 13 1,304 Henkel Annual Report 2017 Consolidated financial statements 111 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Consolidated statement of changes in equity See Notes 10 to 14 for further explanatory information Issued capital Ordinary shares Preferred shares Capital reserve Treasury shares Retained earnings Other components of equity Currency trans- lation Hedge reserve per IAS 39 Available- for-sale reserve 260 178 652 – 91 12,984 – 141 – 184 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2,055 1 – 138 1,917 1 – 633 – – 70 38 – 134 134 – – – – – 7 – – – – – – – – – 184 – – 14 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2,519 124 – 1,325 2,643 – 698 – – 152 75 – 1,325 – 14 – – – – – – – – 260 178 652 – 91 16,104 – 1,332 – 198 80 Total Non-con- trolling interests 150 13,811 40 7 47 – 33 – – 26 – 2,095 1 3 2,098 1 – 666 – – 96 38 138 15,185 1 22 – 9 2,541 – 1,224 13 – 38 – 1,317 – 736 – – 39 – 191 – 74 75 15,650 Share- holders of Henkel AG & Co. KGaA 13,661 2,055 1 – 4 2,051 1 – 633 – – 70 38 15,047 1 2,519 – 1,215 1,304 – 698 – – 152 75 15,576 3 – – – – – – – 3 – – – – – – – 3 in million euros At January 1, 2016 Net income Other comprehensive income Total comprehensive income for the period Dividends Sale of treasury shares Changes in ownership interest with no change in control Other changes in equity Net income Other comprehensive income Total comprehensive income for the period Dividends Sale of treasury shares Changes in ownership interest with no change in control Other changes in equity At December 31, 2017 At Dec. 31, 2016 / Jan. 1, 2017 260 178 652 – 91 14,236 1 1 Adjusted following the final allocation of the purchase price for the acquisition of The Sun Products Corporation, which resulted in an increase of 2 million euros in retained earnings. 112 Consolidated financial statements Henkel Annual Report 2017 Consolidated statement of cash flows See Note 37 for further explanatory information in million euros Operating profit (EBIT) Income taxes paid Amortization / depreciation / impairment / write-ups of intangible assets and property, plant and equipment 1 Net gains / losses on disposal of intangible assets and property, plant and equipment, and from divestments Change in inventories Change in trade accounts receivable Change in other assets Change in trade accounts payable Change in other liabilities, provisions and equity Cash flow from operating activities Purchase of intangible assets and property, plant and equipment including payments on account Acquisition of subsidiaries and other business units Purchase of associated companies and joint ventures held at equity Proceeds on disposal of subsidiaries and other business units Proceeds on disposal of intangible assets and property, plant and equipment Cash flow from investing activities Dividends paid to shareholders of Henkel AG & Co. KGaA Dividends paid to non-controlling shareholders Interest received Interest paid Dividends and interest paid and received Repayment / Issuance of bonds Other changes in borrowings Allocations to pension funds Other changes in pension obligations Purchase of non-controlling interests with no change of control Other financing transactions 2 Cash flow from financing activities Net change in cash and cash equivalents Effect of exchange rates on cash and cash equivalents Change in cash and cash equivalents Cash and cash equivalents at January 1 Cash and cash equivalents at December 31 1 Of which: Impairment in fiscal 2017: 47 million euros (fiscal 2016: 68 million euros). 2 Other financing transactions in fiscal 2017 include payments of –231 million euros for the purchase of short-term securities and time deposits as well as for the provision of financial collateral (fiscal 2016: –34 million euros). Additional voluntary information: Reconciliation to free cash flow in million euros Cash flow from operating activities Purchase of intangible assets and property, plant and equipment including payments on account Proceeds on disposal of intangible assets and property, plant and equipment Net interest paid Other changes in pension obligations Free cash flow 81 2017 3,055 – 727 672 – 36 – 181 – 322 29 217 – 239 2,468 – 700 2016 2,775 – 769 570 – 7 10 – 240 – 108 341 278 2,850 – 557 – 3,727 – 1,830 – – 34 – 5 53 31 – 4,250 – 633 – 2,451 – 698 – 33 20 – 26 – 672 2,221 519 – 185 – 116 – 102 13 1,678 278 – 65 213 1,176 1,389 2016 2,850 – 557 34 – 6 – 116 2,205 – 38 22 – 56 – 770 535 419 – 112 – 64 – 157 – 266 – 415 – 398 – 75 – 473 1,389 916 82 2017 2,468 – 700 31 – 34 – 64 1,701 Henkel Annual Report 2017 Notes to the consolidated financial statements 113 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Group segment report by business unit 1 0.6 % 0.4 % 1.9 % 297 278 7.1 % 16.2 % 15.2 % 281 293 – 4.0 % 15.4 % 16.1 % 808 779 3.8 % 36.8 % 35.7 % Beauty Care Laundry & Home Care Operating business units total Corporate 83 Henkel Group Industrial Business Total Adhesive Technolo- gies Adhesives for Consumers, Craftsmen and Building 1,832 7,556 9,387 3,868 6,651 19,906 123 20,029 9 % 38 % 47 % 19 % 33 % 99 % 1 % 100 % 1,822 7,139 8,961 3,838 5,795 18,593 121 18,714 5.8 % 7.6 % 5.8 % 4.8 % 6.1 % 5.0 % 1,360 1,284 1,657 1,561 5.9 % 18.0 % 18.0 % 6.1 % 17.7 % 17.4 % 0.8 % 2.1 % 0.5 % 535 526 1.7 % 13.8 % 13.7 % 14.8 % 18.2 % 2.0 % 7.1 % 9.1 % 3.1 % 1.8 % – – 7.0 % 9.0 % 3.1 % 989 803 3,181 2,890 – 126 – 115 3,055 2,775 23.2 % 14.9 % 13.9 % 10.1 % 16.0 % 15.5 % – – – 10.1 % 15.3 % 14.8 % 1,452 1,336 1,734 1,629 665 647 1,170 1,000 3,568 3,276 – 107 – 104 3,461 3,172 8.7 % 19.2 % 18.7 % 6.4 % 18.5 % 18.2 % 2.7 % 17.2 % 16.9 % 17.0 % 17.6 % 17.3 % 8.9 % 17.9 % 17.6 % 7,429 7,054 8,237 7,833 3,038 2,882 7,557 5,104 18,832 15,819 5.3 % 18.5 % 18.2 % 5.2 % 20.3 % 19.9 % 5.4 % 17.6 % 18.2 % 48.1 % 13.1 % 15.7 % 19.0 % 17.0 % 18.3 % 43 1 – 43 1 – 76 89 1,420 655 765 1,399 660 739 269 40 – 223 7 – 1,214 191 9,263 2,324 6,939 8,698 2,145 6,553 312 41 – 266 8 – 1,290 280 10,683 2,979 7,704 10,096 2,805 7,291 100 – – 97 23 – 834 274 4,491 1,627 2,864 4,233 1,537 2,696 246 6 – 194 37 – 351 3,867 10,441 2,700 7,741 7,752 2,380 5,372 658 47 – 557 68 – 2,475 4,421 25,614 7,305 18,309 22,082 6,722 15,359 – – – 38 77 – – – 14 – – 13 – – 6 9 528 491 38 459 382 77 9.1 % 17.3 % 16.9 % 18,870 15,895 18.7 % 16.3 % 17.5 % 672 47 – 570 68 – 2,481 4,430 26,142 7,796 18,347 22,540 7,104 15,436 in million euros Sales 2017 Proportion of Henkel sales Sales 2016 Change from previous year Adjusted for foreign exchange Organic EBIT 2017 EBIT 2016 Change from previous year Return on sales (EBIT) 2017 Return on sales (EBIT) 2016 Adjusted EBIT 2017 Adjusted EBIT 2016 Change from previous year Adjusted return on sales (EBIT) 2017 Adjusted return on sales (EBIT) 2016 Capital employed 2017 2 Capital employed 2016 2 Change from previous year Return on capital employed (ROCE) 2017 Return on capital employed (ROCE) 2016 Amortization / depreciation / impairment / write-ups of intangible assets and property, plant and equip- ment 2017 of which impairment losses 2017 of which write-ups 2017 Amortization / depreciation / impairment / write-ups of intangible assets and property, plant and equipment 2016 of which impairment losses 2016 of which write-ups 2016 Capital expenditures (excl. financial assets) 2017 Capital expenditures (excl. financial assets) 2016 Operating assets 2017 3 Operating liabilities 2017 Net operating assets 2017 3 Operating assets 2016 3 Operating liabilities 2016 Net operating assets 2016 3 1 Calculated on the basis of units of 1,000 euros. 2 Including goodwill at cost prior to any accumulated impairment in accordance with IFRS 3.79 (b). 3 Including goodwill at net book value. 114 Notes to the consolidated financial statements Henkel Annual Report 2017 Key financials by region 1 in million euros Sales 2 2017 Sales 2 2016 Change from previous year Adjusted for foreign exchange Organic Proportion of Group sales 2017 Proportion of Group sales 2016 Operating profit (EBIT) 2017 Operating profit (EBIT) 2016 Change from previous year Adjusted for foreign exchange Return on sales (EBIT) 2017 Return on sales (EBIT) 2016 84 Western Europe Eastern Europe Africa / Middle East North America Latin America Asia- Pacific Total Regions Corporate Henkel Group 6,033 5,999 2,897 2,713 1,302 1,378 5,162 4,202 1,142 1,055 3,371 3,246 19,906 18,593 123 121 20,029 18,714 0.6 % 1.3 % 0.5 % 30 % 32 % 1,463 1,335 9.6 % 9.8 % 24.3 % 22.3 % 6.8 % 6.3 % 6.0 % 14 % 15 % 280 328 – 14.8 % – 18.3 % 9.7 % 12.1 % – 5.5 % 7.5 % 1.7 % 6 % 7 % 58 111 – 47.7 % – 48.0 % 4.5 % 8.1 % 22.9 % 24.6 % 3.0 % 26 % 22 % 731 505 44.7 % 47.7 % 14.2 % 12.0 % 8.2 % 9.5 % 4.4 % 6 % 6 % 112 126 – 10.8 % – 8.2 % 9.8 % 11.9 % 3.8 % 6.1 % 5.9 % 17 % 17 % 7.1 % 9.1 % 3.1 % 99 % 99 % – – – 1 % 1 % 537 485 3,181 2,890 – 126 – 115 10.8 % 13.3 % 15.9 % 14.9 % 10.1 % 10.8 % 16.0 % 15.5 % – – – – 7.0 % 9.0 % 3.1 % 100 % 100 % 3,055 2,775 10.1 % 10.4 % 15.3 % 14.8 % 1 Calculated on the basis of units of 1,000 euros. 2 By location of company. In 2017, the affiliated companies domiciled in Germany, including Henkel AG & Co. KGaA, generated sales of 2,388 mil- lion euros (previous year: 2,339 million euros). Sales realized by the affiliated companies domiciled in the USA amounted to 4,864 million euros in 2017 (previous year: 3,943 million euros). In fiscal 2016 and 2017, no individual customer accounted for more than 10 percent of total sales. Of the total non-current assets disclosed for the Henkel Group at December 31, 2017 (excluding financial instruments and deferred tax assets) amounting to 18,836 million euros (previ- ous year: 18,620 million euros), 2,149 million euros (previous year: 1,964 million euros) was attributable to the affiliated companies domiciled in Germany, including Henkel AG & Co. KGaA. The non-current assets (excluding financial instru- ments and deferred tax assets) recognized in respect of the affiliated companies domiciled in the USA amounted to 10,126 million euros at December 31, 2017 (previous year: 10,735 million euros). Henkel Annual Report 2017 Notes to the consolidated financial statements 115 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Accounting principles and methods applied in preparation of the consolidated financial statements General information Scope of consolidation The consolidated financial statements of Henkel AG & Co. KGaA (Düsseldorf Regional Court, HRB 4724), Düsseldorf, as of December 31, 2017, have been prepared in accordance with International Financial Reporting Standards (IFRSs) and the relevant interpretations of the International Financial Report- ing Interpretations Committee (IFRIC), as adopted per Regula- tion number 1606/2002 of the European Parliament and the Council, on the application of international accounting stan- dards in the European Union, and in compliance with Section 315a German Commercial Code [HGB]. The consolidated finan- cial statements are published in the electronic federal gazette. The individual financial statements of the companies included in the consolidation are drawn up on the same accounting date, December 31, 2017, as that of Henkel AG & Co. KGaA. Members of the KPMG organization or other independent firms of auditors instructed accordingly have audited the financial statements of the material companies included in the consolidation. The Management Board of Henkel Manage- ment AG – which is the Personally Liable Partner of Henkel AG & Co. KGaA – compiled the consolidated financial statements on January 30, 2018, and approved them for forwarding to the Supervisory Board and for publication. The consolidated financial statements are based on the princi- ple of historical cost with the exception that certain financial instruments are accounted for at their fair values, and pension obligations are measured using the projected unit credit method. The functional currency of Henkel AG & Co. KGaA and the reporting currency of the Group is the euro. Unless otherwise indicated, all amounts are shown in million euros. In order to improve the clarity and informative value of the consolidated financial statements, certain items are combined in the con- solidated statement of financial position, the consolidated statement of income and the consolidated statement of com- prehensive income, and then shown separately in the notes. In addition to Henkel AG & Co. KGaA as the ultimate parent company, the consolidated financial statements at December 31, 2017, include 14 German and 227 non-German companies in which Henkel AG & Co. KGaA has a dominating influence over financial and operating policies, based on the concept of control. The Group has a dominating influence on a company when it is exposed, or has rights, to variable returns from its involvement with the company and has the ability to affect those returns through its power over the company. Companies in which the stake held represents less than half of the voting rights are fully consolidated if Henkel AG & Co. KGaA controls them, as defined in IFRS 10, through contractual agreements or the right to appoint corporate bodies. Henkel AG & Co. KGaA prepares the consolidated financial statements for the largest and the smallest groups of companies to which Henkel AG & Co. KGaA and its subsidiaries belong. The following table shows the changes to the scope of consoli- dation in fiscal 2017: Scope of consolidation At January 1, 2017 Additions Mergers Disposals At December 31, 2017 85 208 45 – 7 – 4 242 Further details can be found in the section “Acquisitions and divestments” below. Subsidiaries which are of secondary importance to the Group and to the presentation of a true and fair view of our net assets, financial position and results of operations due to their inac- tivity or low level of activity are generally not included in the consolidated financial statements. The total assets of these companies represent less than 1 percent of the Group’s total assets; their total sales and income (net of taxes) are also less than 1 percent of the Group totals. 116 Notes to the consolidated financial statements Henkel Annual Report 2017 Acquisitions and divestments Acquisitions Effective July 3, 2017, we completed the acquisition of the global Darex Packaging Technologies business from GCP Applied Technologies and of all associated shares. The acqui- sition included various share and asset deals; legal transfer of certain asset deals is still outstanding. As a consequence of the purchase agreement, overall control of the acquired Darex Packaging Technologies business was transferred to Henkel as defined in IFRS 10 Consolidated Financial Statements, and the business therefore fully consolidated, effective July 3, 2017. The purchase price was 938 million euros, settled in cash. The transaction is in line with our strategy to strengthen our port- folio through targeted acquisitions and reinforces the position of our Adhesive Technologies business as global market and technology leader. Provisional goodwill was recognized in the amount of 686 million euros. Goodwill of 221 million euros was recognized for tax purposes. Effective July 3, 2017, we completed the acquisition of all shares of Sonderhoff Holding GmbH based in Cologne, Germany. The purchase price was 119 million euros, settled in cash. This acquisition expands the sealant expertise of Henkel and reinforces the position of our Adhesive Technologies business as global market and technology leader. Effective September 1, 2017, the acquisition of all shares of Nattura Laboratorios, S.A. de C.V., Mexico, and associated companies in the USA, Colombia and Spain was completed. Through this acquisition, Henkel will further strengthen its Hair Salon business and expand its footprint in both the emerging and mature markets. The purchase price was 392 million euros, settled in cash. Provisional goodwill was recognized in the amount of 265 million euros. Tax-deductible goodwill is not expected. Effective December 28, 2017, we completed the acquisition of all shares of Zotos International Inc., the North American hair salon business of Shiseido Company, Limited. This acquisition is part of our strategy to strengthen Henkel’s position in attrac- tive markets and categories and expands our Hair Salon busi- ness in the USA, the world’s largest single hair salon market. The purchase price was 403 million euros, settled in cash. Pro- visional goodwill was recognized in the amount of 280 million euros. Tax-deductible goodwill is not expected. The goodwill acquired through the acquisition of Darex Packaging Technologies, Nattura Laboratorios, S.A. de C.V. and Zotos International Inc. represents both offensive and defen- sive synergies, achieved through integration in Henkel’s existing organization, and mirrors the growth potential of the acquired businesses. Because the acquisition of Zotos International Inc. was recently completed, and Darex Packaging Technologies busi- ness, Sonderhoff Holding GmbH and Nattura Laboratorios, S.A. de C.V. were acquired during the course of the year, the allocation of the purchase prices to the acquired assets and lia- bilities in accordance with IFRS 3 Business Combinations is provisional. The carrying amounts of the acquired assets and liabilities are determined by the contracts and our opening balances on each respective acquisition date. The recognition and measurement principles adopted by the Henkel Group were applied. If the acquisition of the global Darex Packaging Technologies business – and thus its business activities – had been com- pleted by January 1, 2017, sales for the Henkel Group for the reporting period January 1 to December 31, 2017, would be higher by 262 million euros and income after tax would be lower by 5 million euros, taking acquisition-related costs into account. The business activities actually contributed 133 mil- lion euros to sales and –9 million euros to income after tax. Acquisition-related costs amounted to 7 million euros. If the acquisition of all shares of Sonderhoff Holding GmbH and of Nattura Laboratorios, S.A. de C.V. and the acquisition of Zotos International Inc. – and thus their business activities – had been completed by January 1, 2017, sales for the Henkel Group for the reporting period January 1 to December 31, 2017, would be higher by 389 million euros and income after tax would be higher by 25 million euros, taking acquisition-re- lated costs into account. The business activities actually con- tributed 73 million euros to sales and 7 million euros to income after tax. Acquisition-related costs amounted to 4 mil- lion euros. In the second quarter of 2017, we spent around 8 million euros for the acquisition of the outstanding non-controlling shares in Shanghai Henkel Xianghua Adhesives Co. Ltd. based in Shang- hai, China, increasing our ownership interest to 100 percent. In the third quarter of 2017, we spent around 140 million euros for the acquisition of the outstanding non-controlling shares in Henkel Polybit Industries Ltd. based in Umm al-Quwain, United Arab Emirates, which are held on behalf of the Henkel Group. A performance-related purchase price component was also agreed. The carrying amount of the acquired non-con- trolling interests was 37 million euros. Retained earnings were reduced by 143 million euros. In the fourth quarter of 2017, we spent around 3 million euros for the acquisition of the outstanding non-controlling shares in Eczacibasi Schwarzkopf based in Istanbul, Turkey, increas- ing our ownership interest to 100 percent. Henkel Annual Report 2017 Notes to the consolidated financial statements 117 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Acquisitions in million euros Intangible assets Property, plant and equipment Other non-current assets Non-current assets Inventories Trade accounts receivable Liquid funds Other current assets Current assets Total assets Net assets Non-current liabilities Other current provisions / liabilities Trade accounts payable Current liabilities Total equity and liabilities Darex Packaging Technologies, effective July 3, 2017 Others Fair value Fair value 858 65 6 929 32 56 15 13 116 1,045 938 55 21 31 52 782 113 18 913 60 61 40 10 171 1,084 968 75 23 18 41 1,045 1,084 Reconciliation of the purchase price to provisional goodwill in million euros Darex Packaging Technologies, effective July 3, 2017 Purchase price Adjustment based on purchase agreement Fair value of the acquired assets and liabilities Provisional goodwill Others Purchase price Adjustment based on purchase agreement Fair value of the acquired assets and liabilities Provisional goodwill 86 Total 1,640 178 24 1,842 92 117 55 23 287 2,129 1,906 130 44 49 93 2,129 87 2017 938 – 252 686 968 – 296 672 Divestments On January 1, 2017, we sold our professional Western European building material business for around 27 million euros. This transaction resulted in one-time gains of 19 million euros. In the first half of 2017, we sold our global electronic mold compound business, including Henkel Huawei Electronics, our company in Lianyungang, China. The sale price was around 34 million euros whereby a divestment gain of 1 mil- lion euros was recognized. 118 Notes to the consolidated financial statements Henkel Annual Report 2017 In the recognition of acquisitions of less than 100 percent, non-controlling interests are measured at the fair value of the share of net assets that they represent. Contingent futures contracts on non-controlling interests are recognized by the anticipated acquisition method. Accordingly, the acquisition of the outstanding non-controlling interests is already included as part of the first-time consolidation in the form of a contingent purchase price liability. In subsequent years, the carrying amount of the Henkel AG & Co. KGaA investment is eliminated against the current (share of) equity in the subsidiary entities concerned. Changes in the shareholdings of subsidiary companies result- ing in a decrease or an increase in the participating interests of the Group without loss of control are recognized within equity as changes in ownership without loss of control. As soon as the control of a subsidiary is relinquished, all the assets and liabilities and the non-controlling interests, and also the accumulated currency translation gains or losses, are derecognized. In the event that Henkel continues to own non-controlling interests in the non-consolidated entity, these are measured at fair value. The result of deconsolidation is recognized under other operating income or expenses. Consolidation methods The financial statements of Henkel AG & Co. KGaA and of the subsidiaries included in the consolidated financial statements were prepared on the basis of uniformly valid principles of recognition and measurement, applying the standardized year-end date adopted by the Group. Such entities are included in the consolidated financial statements as of the date on which the Group acquired control. All receivables and liabilities, sales, income and expenses, as well as intra-group profits on transfers of non-current assets or inventories, are eliminated on consolidation. The purchase method is used for capital consolidation. With business combinations, therefore, all hidden reserves and hid- den charges in the entity acquired are revalued at the time of acquisition, and all identifiable intangible assets are sepa- rately disclosed if they are clearly separable or if their recogni- tion arises from a contractual or other legal right. Any differ- ence arising between the acquisition cost and the (share of) net assets after purchase price allocation is recognized as goodwill. The goodwill of subsidiaries is measured in the functional currency of the subsidiary. Entities acquired are included in the consolidation for the first time as subsidiaries by offsetting the carrying amount of the respective parent company’s investment in them against their assets and liabilities. Contingent consideration is recognized at fair value as of the date of first-time consolidation. Subse- quent changes in value do not result in an adjustment to the valuation at the time of acquisition. Acquisition-related costs are not included in the purchase price. Instead, they are recog- nized through profit or loss in the period in which they occur. Henkel Annual Report 2017 Notes to the consolidated financial statements 119 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Companies recognized by the equity method Associated companies and joint ventures are recognized by the equity method. An associated company is a company over which the Group can exercise material influence on the financial and operating policies without controlling it. Material influence is generally assumed when the Group holds 20 percent or more of the voting rights. Where a Group company conducts transactions with an associated company or a joint venture, the resulting profits or losses are eliminated in accordance with the share of the Group in that company. The Group consolidates Vitriflex, Inc. and Zipjet Global S.à r.l. using the equity method. The carrying amount of the share- holdings recognized by the equity method as of December 31, 2017, was 1 million euros (previous year: 7 million euros). Associated companies that are less relevant for the Group and for the presentation of a fair view of its net assets, financial position and results of operations, are never recognized by the equity method. They are always recognized at amortized cost. Currencies Chinese yuan Mexican peso Polish zloty Russian ruble Turkish lira US dollar ISO code CNY MXN PLN RUB TRY USD Currency translation The annual financial statements of the consolidated compa- nies, including the hidden reserves and hidden charges of Group companies recognized by the purchase method, good- will arising on consolidation, and the consolidated statement of cash flows, are translated into euros using the functional currency method outlined in International Accounting Standard (IAS) 21 The Effects of Changes in Foreign Exchange Rates. The functional currency is the currency in which a for- eign company predominantly generates funds and makes payments. As the functional currency for all the companies included in the consolidation is generally the local currency of the company concerned, assets and liabilities are translated at closing rates, while income and expenses are translated at the average rates for the year as an approximation of the actual rates at the date of the transaction. Equity items are recognized at historical exchange rates. The differences arising from using average rather than closing rates are taken to equity and shown as other components of equity, or as non-controlling interests, and remain neutral in respect of net income until the shares are divested. In the subsidiaries’ annual financial statements, transactions in foreign currencies are converted at the rates prevailing at the time of the transaction. Financial assets and liabilities in foreign currencies are measured at closing rates through profit or loss. For the main currencies in the Group, the following exchange rates have been used based on 1 euro: Average exchange rate Exchange rate on December 31 2016 7.36 20.67 4.36 74.07 3.34 1.11 2017 7.63 21.33 4.26 65.95 4.12 1.13 2016 7.32 21.77 4.41 64.30 3.71 1.05 88 2017 7.80 23.66 4.12 69.39 4.55 1.20 120 Notes to the consolidated financial statements Henkel Annual Report 2017 Recognition and measurement methods Summary of selected measurement methods Financial statement figures Measurement method 89 Assets Goodwill Other intangible assets with indefinite useful lives with definite useful lives Property, plant and equipment Financial assets (categories per IAS 39) “Loans and receivables” “Available for sale” “Held for trading” “Fair value option” Other assets Inventories Assets held for sale Lower of carrying amount and recoverable amount (“impairment only” method) Lower of carrying amount and recoverable amount (“impairment only” method) (Amortized) cost less any impairment losses (Depreciated) cost less any impairment losses (Amortized) cost using the effective interest method Fair value with gains or losses recognized directly in equity 1 Fair value through profit or loss Fair value through profit or loss (Amortized) cost Lower of cost and fair value less costs to sell Lower of cost and fair value less costs to sell 1 Apart from permanent impairment losses and effects arising from measurement in a foreign currency. Equity and liabilities Provisions for pensions and similar obligations Present value of future obligations (projected unit credit method) Other provisions Settlement amount Financial liabilities (categories per IAS 39) “Measured at amortized cost” (Amortized) cost using the effective interest method “Held for trading” Other liabilities Fair value through profit or loss Settlement amount The methods of recognition and measurement, which are basically unchanged from the previous year, are described in detail in the notes relating to the individual items of the state- ment of financial position on these pages. Also provided as part of the report on our financial instruments (Note 21 on pages 149 to 161) are the disclosures relevant to International Financial Reporting Standard (IFRS) 7 showing the breakdown of our financial instruments by category, our methods for fair value measurement, and the derivative financial instruments that we use. Changes in the methods of recognition and measurement aris- ing from revised and new standards are applied retrospec- tively, provided that the effect is material and there are no alternative regulations that supersede the standard concerned. The consolidated statement of income from the previous year and the opening balance for this comparative period are adjusted as if the new methods of recognition and measure- ment had always been applied Henkel Annual Report 2017 Notes to the consolidated financial statements 121 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Accounting estimates, assumptions and discretionary judgments Preparation of the consolidated financial statements is based on a number of accounting estimates and assumptions. These have an impact on the reported amounts of assets, liabilities and contingent liabilities at the reporting date and the disclo- sure of income and expenses for the reporting period. The actual amounts may differ from these estimates. The accounting estimates and their underlying assumptions are based on past experience and are continually reviewed. Changes in accounting estimates are recognized in the period in which the change takes place where such change exclu- sively affects that period. A change is recognized in the period in which it occurs and in later periods where such change affects both the reporting period and subsequent periods. The judgments of the Management Board regarding the applica- tion of those IFRSs which have a significant impact on the consolidated financial statements are presented in particular in the explanatory notes on taxes on income (Note 30 on pages 164 to 166), intangible assets (Note 1 on pages 125 to 128), pro- visions for pensions and similar obligations (Note 15 on pages 135 to 143), income tax provisions and other provisions (Note 16 on pages 144 and 145), financial instruments (Note 21 on pages 149 to 161) and share-based payment plans (Note 34 on pages 168 and 169). Material discretionary judgments are made in respect of the demarcation of the cash-generating units as explained in Note 1 on pages 125 to 128 and the segment reporting as explained in Note 35 on pages 169 and 170. Contingent forward contracts for acquired minority interests are recognized by the anticipated acquisition method. 122 Notes to the consolidated financial statements Henkel Annual Report 2017 New international accounting regu- lations according to International Financial Reporting Standards (IFRSs) Accounting regulations not applied in advance of their effective date The following standards and amendments to existing stan- dards of possible relevance to Henkel, which have been adopted into EU law (endorsement mechanism) but are not yet mandatory, have not been applied early: Accounting regulations applied for the first time in the year under review 90 Accounting regulations not applied in advance of their effective date 91 IAS 7 (Amendment) Disclosure Initiative January 1, 2017 IFRS 9 Financial Instruments Mandatory for fiscal years beginning on or after IAS 12 (Amendment) Recognition of Deferred Tax Assets for Unrealised Losses Improvements to IFRSs 2014–2016: Amendments to IFRS 12 January 1, 2017 IFRS 16 Leases IFRS 15 Revenue from Contracts with Customers January 1, 2017 IFRS 4 (Amendment) Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts IFRS 15 (Amendment) Clarifications to IFRS 15 Improvements to IFRSs 2014–2016: Amendments to IFRS 1 and IAS 28 Mandatory for fiscal years beginning on or after January 1, 2018 January 1, 2018 January 1, 2019 January 1, 2018 January 1, 2018 January 1, 2018 • The amendment to IAS 7 improves disclosures relating to changes in liabilities arising from financing activities. Enti- ties are required to make additional disclosures in relation to changes in such financial liabilities for which related cash inflows and outflows are reflected in cash flow from financing activities. Associated financial assets must also be included in the disclosures (for example, assets from hedg- ing transactions). The following must be disclosed: changes from financing cash flows, changes arising from obtaining or losing control of subsidiaries or other businesses, the effect of changes in foreign exchange rates, changes in fair values, and other changes. The information must be dis- closed as a statement of reconciliation from the opening balance on the statement of financial position to the closing balance on the same statement. The Group discloses the changes between the opening and closing balances of the relevant financial liabilities in a reconciliation statement (Note 37 on page 172). • The amendments to IAS 12 clarify the accounting procedure for deferred tax claims relating to unrealized losses on debt instruments that are measured at fair value. The changes will not have any material impact on the consolidated finan- cial statements of Henkel. • The Annual Improvements to IFRSs (2014–2016) included amendments to three IFRSs, of which only one was manda- torily applicable in 2017: IFRS 12 clarifies that disclosures under IFRS 12 must always include those shares in subsid- iaries, joint ventures or associates that are classified as available for sale as defined in IFRS 5, with the exception of the disclosures stipulated under IFRS 12.B10-B16 (Financial Information). The changes will not have any material impact on the consolidated financial statements of Henkel. IFRS 9 Financial Instruments, issued in July 2014, supersedes the existing guidance in IAS 39 Financial Instruments: Recog- nition and Measurement. IFRS 9 contains revised guidance on the classification and measurement of financial instruments, including a new model for expected credit losses to calculate the impairment of financial assets, and the new general accounting rules for hedging transactions. The standard has also adopted the guidance on recognition and derecognition of financial instruments from IAS 39. The classification and measurement rules of IFRS 9 must be applied retrospectively. Adjustment of prior-year periods is not required. The rules for hedge accounting must be applied prospectively. IFRS 9 contains three key categories for classifying financial assets: measured at amortized cost, measured at fair value through profit or loss and measured at fair value through other comprehensive income. The standard eliminates the catego- ries held to maturity, loans and receivables and available for sale that were specified in IAS 39. Henkel does not expect the application of the new classification requirements to substan- tially affect the recognition of its financial assets. IFRS 9 will mainly affect the valuation of trade accounts receiv- able at Henkel. Under IAS 39, valuation allowances were only recognized for impairment that had occurred but was as yet unidentified (incurred loss model), whereas IFRS 9 specifies the use of the expected loss model when quantifying valuation allowances for expected credit losses. To determine these allowances, the expected credit losses are measured over the lifetime of the assets given their current nature. To calculate the expected credit losses, customers are grouped by similar credit default risks. In addition to this collective assessment, credit risks are also assessed individually if the default risk Henkel Annual Report 2017 Notes to the consolidated financial statements 123 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events has increased significantly as of the reporting date. The effects upon first-time application on January 1, 2018, must be recog- nized in equity. We expect the application of IFRS 9 to result in a change in the valuation allowances on trade accounts receiv- able of less than 5 million euros, which will affect equity accordingly by the same amount. Given the current situation, we expect a minor impact on marketing, selling and distribu- tion expenses in the year of implementation. Under IFRS 9, the Group must ensure that its hedge account- ing is consistent with the Group risk management objectives and strategy. All types of hedge accounting currently applied by Henkel comply with the requirements of IFRS 9. Within Henkel Group, forward exchange contracts are used to hedge future cash flows in foreign currencies. The Group only designates the spot component of these hedging transactions. Under IAS 39, this (effective) portion of a cash flow hedge was recognized in the hedge reserve in equity. The amounts recorded in equity were recognized through profit or loss in the period in which the results were affected by the hedged transaction. Under IFRS 9, these amounts will initially be included as part of the initial cost when recognizing the underlying. They will continue to affect the result for the period in which the hedged transaction influences the result for the period. tations. It replaces the existing guidance on revenue recogni- tion, including IAS 18 Revenue, IAS 11 Construction Contracts, and IFRIC 13 Customer Loyalty Programmes. Clarifying amend- ments to IFRS 15 were published in April 2016, primarily relat- ing to the identification of separate performance obligations and the clear distinction between principals and agents. IFRS 15 mainly affects Henkel’s accounting for product returns and the timing of sales deductions. In case of expected pro- duct returns which can be reliably estimated, an asset repre- senting the right of return and a provision for the respective refund are recognized. Henkel will apply IFRS 15 to all contracts using the cumulative method. Accordingly, the effects of first-time application must be recognized cumulatively in equity upon first-time applica- tion on January 1, 2018. The application of IFRS 15 will result in an increase in both other current assets and other current pro- visions. The resulting decrease in equity is expected to be in the range of upper double-digit million euros. The statement of financial position and statement of income for the compa- rable prior periods will not be adjusted. Given the current situ- ation, we expect a minor impact on sales and on cost of sales in the year of implementation. The quality and scope of the disclosures in the notes to the financial statements will also be expanded. Under IAS 39, the non-designated components were recog- nized directly through profit or loss. According to IFRS 9, how- ever, these components must be recognized in equity in future and included as part of the initial cost when recognizing the underlying. Henkel expects the effects of the anticipated changes in the accounting method for non-designated compo- nents to be in the low single-digit million euro range. IFRS 9 also requires extensive new disclosures, particularly with regard to credit risk and expected defaults, and to hedge accounting. We do not expect IFRS 15 to have any further material effects. IFRS 16 provides a single accounting model for lease contracts in a lessee’s balance sheet. A lessee reflects the right-of-use to the underlying asset (right-of-use asset) as well as a liability representing the future lease payments in the course of the lease contract. Exceptions are provided for short-term leases and leases relating to low-value assets. The accounting requirements for lessors are similar to the current standard, i.e., lessors must continue to distinguish between finance and operating leases. In May 2014, the IASB published the new IFRS 15 Revenue from Contracts with Customers. IFRS 15 specifies a comprehensive framework for determining whether, when and in what amount revenue is recognized. Under IFRS 15, revenue is only recognized when no substantial adjustments to the cumula- tive recognized revenue is expected. This principle is applied in five steps. In step 1, the contract with the customer is iden- tified. In step 2, the distinct performance obligations in the contract are identified. In step 3, the transaction price is deter- mined. In step 4, this transaction price is allocated to the dis- tinct performance obligations. Finally, in step 5, revenue is recognized when the identified distinct performance obliga- tions are satisfied, either over time or at a point in time. The objective of the new standard is to bring together the different regulations contained in various other standards and interpre- IFRS 16 supersedes the existing guidelines on leases, including IAS 17 Leases, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC-15 Operating Leases – Incentives, and SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease. The standard is mandatory for reporting periods beginning on or after January 1, 2019. Early application is permitted if IFRS 15 is also applied. Henkel does not plan to apply IFRS 16 before the effective date. The Group has started to assess the possible impacts of apply- ing IFRS 16 to its consolidated financial statements. The most substantial impact that has been identified so far is that the Group will have to recognize new assets and liabilities for its 124 Notes to the consolidated financial statements Henkel Annual Report 2017 operating leases. In addition, the nature of expenses associ- ated with these leases will change as IFRS 16 replaces the lin- ear recognition of expenses for operating leases with deprecia- tion of right-of-use assets and interest expenses for liabilities arising from the lease. Accounting regulations not yet adopted into EU law In fiscal 2017, the IASB issued the following standards and amendments to existing standards of relevance to Henkel, which still have to be adopted into EU law (endorsement mechanism) before they become applicable: A conclusive assessment and quantification of the impacts is not possible. Also, no decision has yet been made with regard to the transition method that will be applied. Accounting regulations not yet adopted into EU law 92 Mandatory for fiscal years beginning on or after IFRS 2 (Amendment) Classification and Measurement of Share-Based Payment Transactions IFRS 9 (Amendment) Prepayment Features with Negative Compensation IFRS 10 and IAS 28 (Amendment) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture IAS 28 (Amendment) Long-term Interests in Associates and Joint Ventures January 1, 2018 January 1, 2019 outstanding January 1, 2019 These new standards and amendments to existing standards will be applied by Henkel starting in fiscal 2018 or later. A con- clusive assessment of the effects is not possible. Henkel Annual Report 2017 Notes to the consolidated financial statements 125 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Notes to the consolidated statement of financial position The measurement and recognition policies for financial statement items are described in the relevant note. Non-current assets All non-current assets with definite useful lives are depreci- ated or amortized exclusively using the straight-line method on the basis of their estimated useful lives. The useful life esti- mates are reviewed annually. If facts or circumstances indicate the need for impairment, the recoverable amount is deter- mined. It is measured as the higher of the fair value less costs to sell (net realizable value) and the value in use. Impairment losses are recognized if the recoverable amounts of the assets are lower than their carrying amounts. They are charged to the relevant functions. The following unchanged, standardized useful lives are applied: Useful life in years Intangible assets with definite useful lives Residential buildings Office buildings Research and factory buildings, workshops, stores and staff buildings Plant facilities Machinery Office equipment Vehicles Factory and research equipment 93 3 to 20 50 40 25 to 33 10 to 25 7 to 10 10 5 to 20 2 to 5 94 1 Intangible assets Cost in million euros At January 1, 2016 Acquisitions Divestments Additions Disposals Reclassifications to assets held for sale Reclassifications Translation differences At December 31, 2016 / January 1, 2017 Acquisitions Divestments Additions Disposals Reclassifications to assets held for sale Reclassifications Translation differences At December 31, 2017 Trademarks and other rights Assets with indefinite useful lives Assets with definite useful lives Internally generated intangible assets with definite useful lives Intangible assets in development Goodwill Total 2,079 1,012 – – – – – 101 77 3,067 85 – – – – – – 275 2,877 1,598 26 – 6 – 30 – 8 101 29 1,722 197 – 7 – 13 8 – – 80 1,841 270 12 – 8 – 8 – 105 4 391 – – 2 – – 60 – 10 443 117 – – 69 – – – 105 – 81 – – 64 – – – 60 – 2 83 8,861 2,560 1 – – – – 3 – 240 11,658 1,358 – 12 – – 3 – – 1,067 11,940 12,925 3,610 – 83 – 38 – 11 – 350 16,919 1,640 – 12 73 – 13 11 – – 1,434 17,184 1 Adjusted following the final allocation of the purchase price for the acquisition of The Sun Products Corporation, which resulted in an increase of 21 million euros in goodwill. 126 Notes to the consolidated financial statements Henkel Annual Report 2017 Accumulated amortization / impairment in million euros At January 1, 2016 Divestments Write-ups Scheduled amortization Impairment losses Disposals Reclassifications to assets held for sale Reclassifications Translation differences At December 31, 2016 / January 1, 2017 Divestments Write-ups Scheduled amortization Impairment losses Disposals Reclassifications to assets held for sale Reclassifications Translation differences At December 31, 2017 Net book values in million euros At December 31, 2017 At December 31, 2016 Trademarks and other rights Assets with indefinite useful lives Assets with definite useful lives 12 1,039 – – – – – – – – 4 8 – – – – – – – – 8 – – 104 – – 28 – 5 – 16 1,126 – – 180 – – 13 6 – – 51 1,248 95 Goodwill Total Intangible assets in development Internally generated intangible assets with definite useful lives 181 – – 34 1 – 8 – – 2 210 – – 44 – – – – – 8 246 – – – – – – – – – – – – – – – – – – – 11 – – – – – – – – 11 – – – 18 – – – – 29 1,243 – – 138 1 – 36 – 5 – 14 1,355 – – 224 18 – 13 6 – – 59 1,531 96 Trademarks and other rights Assets with indefinite useful lives Assets with definite useful lives Intangible assets in development Internally generated intangible assets with definite useful lives Goodwill Total 2,869 3,059 593 596 197 181 83 81 11,911 11,647 15,653 15,564 Goodwill represents the future economic benefit of assets that are acquired through business combinations and not individ- ually identifiable and separately recognized, as well as expected synergies, and is recognized at cost. Trademarks and other rights acquired for valuable consideration are stated at purchase cost, while internally generated software is stated at development cost. The change in goodwill resulting from acquisitions and divestments made in the fiscal year is presented in the section “Acquisitions and divestments” on pages 116 and 117. Goodwill as well as trademarks and other rights with indefi- nite useful lives are subjected to an impairment test at least once a year and also when indicators of impairment are pres- ent (“impairment only” approach). Additions to internally generated intangible assets mostly reflect investments in consolidating and optimizing our IT system architecture for managing business processes. The goodwill impairment of 18 million euros relates to discon- tinued product lines in our General Industry business. Henkel Annual Report 2017 Notes to the consolidated financial statements 127 Amortization and impairment of trademarks and other rights are recognized as selling expenses. Amortization and impair- ment of other intangible assets are allocated to the relevant functions in the consolidated statement of income. In the course of our annual impairment test, we reviewed the carrying amounts of goodwill. The following table shows the cash-generating units together with the associated goodwill at book value at the reporting date. The description of the cash-generating units can be found in Note 35 on page 169 and in the combined management report on pages 72 to 77. 97 At December 31, 2016 At December 31, 2017 Goodwill Terminal growth rate Weighted average cost of capital Goodwill Terminal growth rate Weighted average cost of capital 2,012 476 416 1,513 404 4,821 1,461 314 1,775 3,748 1,303 5,051 1.50 % 1.50 % 1.00 % 1.50 % 1.00 % 1.00 % 1.00 % 1.00 % 1.00 % 7.00 % 7.00 % 7.00 % 7.00 % 7.00 % 6.25 % 6.25 % 6.25 % 6.25 % 1,882 1,104 442 1,346 374 5,148 1,324 806 2,130 3,514 1,119 4,633 1.50 % 1.50 % 1.00 % 1.50 % 1.00 % 1.00 % 1.00 % 1.30 % 1.40 % 7.25 % 7.25 % 7.25 % 7.25 % 7.25 % 6.25 % 6.25 % 6.25 % 6.25 % Book values – Goodwill Cash-generating units in million euros Packaging and Consumer Goods Adhesives Transport and Metal General Industry Electronics Adhesives for Consumers, Craftsmen and Building Total Adhesive Technologies Branded Consumer Goods Hair Salon Business Total Beauty Care Laundry Care Home Care Total Laundry & Home Care We assess goodwill impairment according to the fair-value- less-costs-to-sell approach on the basis of future estimated cash flows which are obtained from the business budgets approved by the appropriate corporate bodies. The determina- tion of fair value (before deduction of costs to sell) is allocated to valuation level 3 of the fair value hierarchy (see Note 21 on pages 149 to 161). The assumptions upon which the essential planning parameters are based reflect experience gained in the past, aligned to current information provided by external sources. Budgets are prepared on the basis of a financial plan- ning horizon of four years. For the period after that, a growth rate in a range between 1 and 2 percent (previous year: 1 and 2 percent) in the cash flows (which in particular takes into account the passing-on of inflation rises to our customers) is assumed for the purpose of impairment testing. The euro to US dollar exchange rate applied is 1.15. Taking into account specific tax effects, the cash flows of the various cash-generating units are discounted at different rates reflecting the weighted average cost of capital (WACC) in each business unit: 6.25 per- cent after tax for both Laundry & Home Care and Beauty Care, and 7.25 percent after tax for Adhesive Technologies. In the Laundry & Home Care business unit, we have assumed an average increase in sales during the four-year detailed fore- casting horizon of 3 to 4 percent per year (previous year: 4 per- cent), with a slight increase in market share. Average sales growth in the Beauty Care business unit over the four-year forecasting horizon is budgeted at 3 to 5 percent per year (previous year: 2 to 4 percent). Here, too, we expect a slight increase in market share. Sales in the Adhesive Technologies business unit are expected to grow by between 2 and 5.5 per- cent per year (previous year: 3 to 5.5 percent) on average over the detailed four-year forecasting horizon, thus exceeding the market average. In all the business units, we assume that a future increase in the cost of raw materials can be extensively offset by cost reduction measures in purchasing and by passing the increase on to our customers, as well as through the implementation of efficiency improvement measures. Given our continued pro-active management of the portfolio, we anticipate achiev- ing at least stable gross margins in all our business units. The impairment tests revealed sufficient impairment buffers so that, as in the previous year, no impairment of goodwill was required. 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 128 Notes to the consolidated financial statements Henkel Annual Report 2017 Trademarks and other rights with indefinite useful lives are presented in the following table. Book values – Trademarks and other rights 98 Cash-generating units (summarized) in million euros Packaging and Consumer Goods Adhesives Transport and Metal General Industry Electronics Adhesives for Consumers, Craftsmen and Building Total Adhesive Technologies Branded Consumer Goods Hair Salon Business Total Beauty Care Laundry Care Home Care Total Laundry & Home Care At December 31, 2016 At December 31, 2017 Trademarks and other rights with indefinite useful lives Terminal growth rate Weighted aver- age cost of capital Trademarks and other rights with indefinite useful lives Terminal growth rate Weighted aver- age cost of capital 51 18 – 90 67 226 603 124 727 1,745 361 2,106 1.50 % 1.50 % 1.00 % 1.50 % 1.00 % 7.00 % 7.00 % 7.00 % 7.00 % 7.00 % 0.20 – 1.80 % 6.25 – 9.00 % 0.20 – 1.80 % 6.25 – 7.80 % 1.00 – 2.00 % 6.25 – 14.40 % 1.00 – 2.00 % 6.25 – 14.30 % 51 18 – 90 66 225 540 191 731 1,586 327 1,913 1.50 % 1.50 % 1.00 % 1.50 % 1.00 % 7.25 % 7.25 % 7.25 % 7.25 % 7.25 % 0.20 – 2.00 % 6.25 – 8.84 % 0.20 – 2.00 % 6.25 – 10.35 % 1.00 – 2.00 % 6.25 – 13.78 % 1.00 – 2.00 % 6.25 – 13.15 % The trademarks and other rights with indefinite useful lives with a net book value of 2,869 million euros (previous year: 3,059 million euros) are established in their markets and will continue to be intensively promoted. Moreover, there are no other statutory, regulatory or competition-related factors that limit our usage of our brand names. Our annual impairment tests on trademarks and other rights with indefinite useful lives required impairment losses of 0 million euros (previous year: 0 million euros). The company also intends to continue using the brands disclosed as having definite useful lives. No impairment losses were registered with respect to trademarks and other rights with definite useful lives in 2017. We assess impairment of trademarks and other rights with indefinite useful lives according to the fair-value-less-costs- to-sell approach at the level of the cash-generating unit, which consists of either global strategic business units (Adhesive Technologies) or regional strategic business units. We base the approach on future estimated cash flows which are obtained from business budgets. The determination of fair value (before deduction of costs to sell) is allocated to valuation level 3 of the fair value hierarchy (see Note 21 on pages 149 to 161). The assumptions upon which the essential planning parameters are based reflect experience gained in the past, aligned to current information provided by external sources. Budgets are prepared on the basis of a financial planning horizon of four years. For the period after that, a growth rate in a range between 0.2 and 2 percent (previous year: 0.2 and 2 percent) in the cash flows (which mainly reflects inflation expecta- tions) is assumed for the purpose of impairment testing. The euro to US dollar exchange rate applied is 1.15. Taking into account specific tax effects, the cash flows of the various cash- generating units are discounted at different rates, with a range between 6.25 and 13.78 percent applied as the weighted average cost of capital (WACC) to each cash-generating unit. The impairment tests revealed sufficient impairment buffers so that – as in the previous year – no impairment of trademarks and other rights with indefinite useful lives was registered. Henkel Annual Report 2017 Notes to the consolidated financial statements 129 2 Property, plant and equipment Cost in million euros At January 1, 2016 Acquisitions Divestments Additions Disposals Reclassifications to assets held for sale Reclassifications Translation differences At December 31, 2016 / January 1, 2017 Acquisitions Divestments Additions Disposals Reclassifications to assets held for sale Reclassifications Translation differences At December 31, 2017 Accumulated depreciation / impairment in million euros At January 1, 2016 Divestments Write-ups Scheduled depreciation Impairment losses Disposals Reclassifications to assets held for sale Reclassifications Translation differences At December 31, 2016 / January 1, 2017 Divestments Write-ups Scheduled depreciation Impairment losses Disposals Reclassifications to assets held for sale Reclassifications Translation differences At December 31, 2017 Land, land rights and buildings 2,228 85 – 44 – 41 – 155 41 12 2,214 99 – 11 77 – 21 – 3 47 – 104 2,298 Land, land rights and buildings 1,081 – – 65 50 – 27 – 75 – 4 4 1,094 – 4 – 65 9 – 16 – – – 35 1,113 Plant and machinery 3,125 160 – 142 – 137 – 10 179 20 3,479 70 – 33 130 – 98 – 133 – 176 3,505 Factory and office equipment 1,047 11 – 68 – 83 – 51 1 1,095 5 – 3 79 – 82 – 48 – 44 1,098 Assets in the course of construction 302 21 – 222 – – – 271 – 10 264 4 – 304 – – – 228 – 13 331 Plant and machinery Factory and office equipment Assets in the course of construction 2,181 – – 192 13 – 129 – 9 4 8 2,260 – 23 – 226 12 – 93 – – – 85 2,297 782 – – 107 4 – 81 – – 3 2 811 – 2 – 110 8 – 76 – – – 34 817 – 3 – – – – – – 3 – – – – – – – – – – – 99 Total 6,702 277 – 476 – 261 – 165 – 23 7,052 178 – 47 590 – 201 – 3 – – 337 7,232 100 Total 4,041 – – 364 67 – 237 – 84 – 14 4,165 – 29 – 401 29 – 185 – – – 154 4,227 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 130 Notes to the consolidated financial statements Henkel Annual Report 2017 Net book values in million euros At December 31, 2017 At December 31, 2016 Land, land rights and buildings 1,185 1,120 Plant and machinery Factory and office equipment Assets in the course of construction 1,208 1,219 281 284 331 264 101 Total 3,005 2,887 Additions are stated at purchase or manufacturing cost. The latter includes direct costs and appropriate proportions of necessary overheads. Interest charges on borrowings are not included, as Henkel does not currently hold any qualifying assets in accordance with International Accounting Standard (IAS) 23 Borrowing Costs. Cost figures are shown net of invest- ment grants and allowances. Acquisition-related costs incurred in order to make the asset ready for the intended use are capitalized. An overview of the primary investment projects undertaken during the fiscal year can be found on page 78 in the combined management report. At December 31, 2017, property, plant and equipment with a carrying amount of 0 million euros had been pledged as security for existing liabilities (previous year: 0 million euros). The periods over which the assets are depreciated are based on their estimated useful lives as set out on page 125. Scheduled depreciation and impairment losses recognized are allocated to the relevant functions in the consolidated statement of income. Henkel Annual Report 2017 Notes to the consolidated financial statements 131 3 Other financial assets Analysis 102 in million euros Non-current Current Total Non-current Current Total At December 31, 2016 At December 31, 2017 Receivables from associated companies Financial receivables from third parties Derivative financial instruments Investments accounted for using the equity method Other investments Receivable from Henkel Trust e.V. Securities and time deposits Financial collateral provided Sundry financial assets Total 4 13 – 7 56 – – – 15 95 1 25 103 – – 501 2 7 95 734 5 38 103 7 56 501 2 7 110 829 – 14 – 1 22 – – – 13 50 1 12 64 – – 605 203 37 150 1 26 64 1 22 605 203 37 163 1,072 1,122 With the exception of investments, derivatives, securities and time deposits, other financial assets are measured at amortized cost. The receivable from Henkel Trust e.V. relates to pension payments made by Henkel AG & Co. KGaA to retirees for which reimbursement can be claimed from Henkel Trust e.V. Included under securities and time deposits are monies deposited as part of our short-term financial management arrangements. The monies involved are primarily time deposits. Sundry non-current financial assets include, among others, receivables from employees. The sundry current financial assets include the following: • Receivables from sureties and guarantee deposits amounting to 35 million euros (previous year: 37 million euros) • Receivables from suppliers amounting to 15 million euros (previous year: 21 million euros) • Receivables from employees amounting to 11 million euros (previous year: 14 million euros) 4 Other assets Analysis in million euros Tax receivables Payments on account Overfunding of pension obligations Reimbursement rights related to employee benefits Accruals Sundry other assets Total At December 31, 2016 At December 31, 2017 Non-current – – 24 102 21 8 155 Current 242 55 – 13 88 36 434 Total 242 55 24 115 109 44 589 Non-current – – 30 102 28 9 169 Current 247 79 – 10 77 38 451 103 Total 247 79 30 112 105 47 620 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 132 Notes to the consolidated financial statements Henkel Annual Report 2017 5 Deferred taxes Deferred taxes are recognized for temporary differences between the valuation of an asset or a liability in the financial statements and its tax base, for tax losses carried forward, and for unused tax credits. This also applies to temporary differ- ences in valuation arising through acquisitions, with the exception of goodwill. Deferred tax liabilities on taxable temporary differences related to shares in subsidiaries are recognized to the extent that a reversal of this difference is expected in the foreseeable future. Changes in the deferred taxes in the statement of financial position result in deferred tax expenses or income unless the underlying item is directly recognized in other comprehensive income. For items recognized directly in other comprehensive income, the associated deferred taxes are also recognized in other comprehensive income. The valuation, recognition and breakdown of deferred taxes in respect of the various items in the statement of financial posi- tion are disclosed under Note 30 (“Taxes on income”) on pages 164 to 166. 6 Inventories In accordance with IAS 2, reported under inventories are those assets that are intended to be sold in the ordinary course of business (finished products and merchandise), those in the process of production for such sale (work in progress) and those to be utilized or consumed in the course of manufacture or the rendering of services (raw materials and supplies). Pay- ments on account made for the purpose of purchasing inven- tories are likewise disclosed under the inventories heading. Inventories are measured at the lower of cost and net realiz- able value. Inventories are measured using either the “first in, first out” (FIFO) or the average cost method. Manufacturing cost includes not only the direct costs but also appropriate portions of neces- sary overheads (for example goods inward department, raw material storage, filling, costs incurred through to the finished goods warehouse), production-related administrative expenses, the costs of the pensions of people who are employed in the production process, and production-related amortization / depreciation. The overhead add-ons are calculated on the basis of average capacity utilization. Not included, however, are interest expenses incurred during the manufacturing period. The net realizable value is determined as an estimated selling price less costs yet to be incurred through to completion, and necessary selling and distribution costs. Write-downs to the net realizable value are made if, at year-end, the carrying amounts of the inventories are above their realizable fair val- ues. The resultant valuation allowance amounted to 142 mil- lion euros (previous year: 142 million euros). The carrying amount of inventories recognized at fair value less costs to sell amounted to 346 million euros (previous year: 359 million euros). The carrying amount of inventories pledged as security for liabilities was unchanged year on year at 0 million euros. Analysis of inventories 104 in million euros Raw materials and supplies Work in progress Finished products and merchandise Payments on account for merchandise Total At December 31, 2016 At December 31, 2017 544 95 1,290 9 1,938 595 109 1,359 17 2,080 7 Trade accounts receivable Trade accounts receivable amounted to 3,544 million euros (previous year: 3,349 million euros). They are all due within one year. Valuation allowances have been recognized in respect of specific risks as appropriate. Overall, the net balance of depreciation / amortization and additions to / reversals of valuation allowances resulted in income of 1 million euros (previous year: net expense of 25 million euros). Trade accounts receivable 105 At December 31, 2016 At December 31, 2017 in million euros Trade accounts receivable, gross less: cumulative valuation allowances on trade accounts receivable Trade accounts receivable, net 3,467 118 3,349 Development of valuation allowances on trade accounts receivable in million euros Valuation allowances at January 1 Additions / Releases Derecognition of receivables Currency translation effects Valuation allowances at December 31 2016 112 22 – 15 – 1 118 3,647 103 3,544 106 2017 118 – 3 – 10 – 2 103 Henkel Annual Report 2017 Notes to the consolidated financial statements 133 8 Cash and cash equivalents Assets and liabilities held for sale 107 Recognized under cash and cash equivalents are liquid funds, sight deposits and other financial assets with an original term of not more than three months. In accordance with IAS 7, also recognized under cash equivalents are shares in money mar- ket funds which, due to their first-class credit rating and investment in extremely short-term money market securities, undergo only minor value fluctuations and can be readily con- verted within one day into known amounts of cash. Utilized bank overdrafts are recognized in the statement of financial position as liabilities to banks. The volume of cash and cash equivalents decreased compared to the previous year from 1,389 million euros to 916 million euros. Of this figure, 742 million euros (previous year: 1,259 million euros) relates to cash and 174 million euros (pre- vious year: 130 million euros) to cash equivalents. The change is shown in the consolidated statement of cash flows. 9 Assets and liabilities held for sale Assets held for sale are assets that can be sold in their current condition and whose sale is very probable. Disposal must be expected within one year from the time of reclassification as held for sale. Such assets may be individual assets, groups of assets (disposal groups) or business operations (discontinued operations). Assets held for sale are no longer subject to sched- uled depreciation and amortization and are instead recognized at the lower of carrying amount and fair value less costs to sell (level 3), which is determined by current price negotiations with potential buyers. Compared to December 31, 2016, assets held for sale decreased by 14 million euros to 81 million euros. This item mainly relates to the site in Scottsdale, Arizona, USA, which will prob- ably be sold in the second half of 2018 due to the merger of the administrative functions as part of the process of integrating The Sun Products Corporation. No liabilities were held for sale (December 31, 2016: 13 million euros). in million euros Intangible assets and property, plant and equipment Inventories and trade accounts receivable Cash and cash equivalents Other assets Provisions Borrowings Other liabilities Net assets 10 Issued capital Issued capital At December 31, 2016 At December 31, 2017 92 2 – 1 13 – – 82 80 – – 1 – – – 81 108 in million euros At December 31, 2016 At December 31, 2017 Ordinary bearer shares Preferred bearer shares Capital stock 260 178 438 260 178 438 Comprising: 259,795,875 ordinary shares, 178,162,875 non-voting preferred shares. All shares are fully paid in. The ordinary and preferred shares are bearer shares of no par value, each of which represents a nominal proportion of the capital stock amounting to 1 euro. The liquidation proceeds are the same for all shares. The num- ber of ordinary shares issued remained unchanged year on year. The number of preferred shares in circulation was also unchanged year on year, at 174,482,323 as at December 31, 2017. Art. 6 (5) of the Articles of Association governs the allocation of authorized capital. Accordingly, the Personally Liable Part- ner is authorized, with the approval of the Shareholders’ Committee and of the Supervisory Board, to increase the capital of the corporation at any time until April 12, 2020, by up to a nominal amount of 43,795,875 euros in total by issuing up to 43,795,875 new non-voting preferred shares for cash and / or in-kind consideration. The authorization may be utilized to the full extent allowed, or once or several times in installments. The proportion of capital stock represented by shares issued against payment in kind on the basis of this authorization must not exceed a total of 10 percent of the capital stock existing at the time the authorization takes effect. 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 134 Notes to the consolidated financial statements Henkel Annual Report 2017 The Personally Liable Partner is authorized, with the approval of the Shareholders’ Committee and of the Supervisory Board, to set aside the pre-emptive rights of shareholders in the case of a capital increase against payment in kind, particularly for the purpose of business combinations or the (direct or indi- rect) acquisition of entities, operations, parts of businesses, equity interests or other assets, including claims against the corporation or companies dependent upon it within the mean- ing of Section 17 German Stock Corporation Act [AktG]. If capital is increased against payment in cash, all shareholders are essentially assigned pre-emptive rights. However, these may be set aside where necessary, subject to the approval of the Shareholders’ Committee and of the Supervisory Board, in order to dispose of fractional amounts or to grant to holders of bonds with warrants or conversion rights issued by the corpora- tion, or one of the companies dependent upon it, pre-emptive rights corresponding to those that would accrue to such bond- holders following the exercise of their warrant or conversion rights or on fulfillment of their conversion obligations, or if the issue price of the new shares is not significantly below the quoted market price at the time of issue price fixing. In addition, the Personally Liable Partner is authorized to purchase ordinary and / or preferred shares of the corporation at any time until April 12, 2020, up to a maximum nominal proportion of the capital stock of 10 percent. This authoriza- tion can be exercised for any legal purpose. To the exclusion of the pre-emptive rights of existing shareholders, treasury shares may, in particular, be transferred to third parties for the purpose of acquiring entities or participating interests in entities. Treasury shares may also be sold to third parties against payment in cash, provided that the selling price is not significantly below the quoted market price at the time of share disposal. The shares may likewise be used to satisfy warrants or conversion rights granted by the corporation. The Personally Liable Partner has also been authorized, with the approval of the Shareholders’ Committee and of the Supervisory Board, to cancel treasury shares without the need for further resolution by the Annual General Meeting. Insofar as shares are issued or used to the exclusion of pre-emptive rights, the proportion of capital stock represented by such shares shall not exceed 10 percent. Treasury shares held by the corporation at December 31, 2017 amounted to 3,680,552 preferred shares (December 31, 2016: 3,680,552). This represents 0.84 percent of the capital stock and a proportional nominal value of 3.7 million euros. See also the explanatory notes on pages 37 and 38. 11 Capital reserve The capital reserve comprises the amounts received in previous years in excess of the nominal value of preferred shares and convertible warrant bonds issued by Henkel AG & Co. KGaA. 12 Retained earnings Recognized in retained earnings are the following: • Amounts allocated in the financial statements of Henkel AG & Co. KGaA in previous years • Amounts allocated from consolidated net income less those amounts attributable to non-controlling interests • Buy-back of treasury shares by Henkel AG & Co. KGaA at cost and the proceeds from their disposal • Actuarial gains and losses recognized in equity • The acquisition or disposal of ownership interests in subsidiaries with no change in control • Valuation effects following application of the anticipated acquisition method For details on the acquisition of ownership interests in sub- sidiaries with no change in control in fiscal 2017, please see the section “Acquisitions and divestments” on pages 116 and 117. Henkel Annual Report 2017 Notes to the consolidated financial statements 135 13 Other components of equity Reported under this heading are differences reported in equity arising from the currency translation of annual financial state- ments of foreign subsidiaries and also the effects arising from the valuation in total comprehensive income of financial assets in the “Available for sale” category and of derivative financial instruments for which hedge accounting is used. The latter are derivatives used in connection with cash flow hedges or hedges of a net investment in a foreign entity. Due in partic- ular to the depreciation of the US dollar versus the euro, the negative difference attributable to shareholders of Henkel AG & Co. KGaA arising from currency translation increased compared to the figure at December 31, 2016, by 1,325 million euros to –1,332 million euros. 14 Non-controlling interests Recognized under non-controlling interests are equity shares held by third parties measured on the basis of the proportion of net assets. 15 Provisions for pensions and similar obligations Description of the pension plans Employees in companies included in the consolidated financial statements 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 regimes of each country. The level of benefits provided is based, as a rule, on the length of service and on the income of the person entitled. Details of pension benefits for members of the Management Board are provided in the remuneration report on pages 46 to 57. In defined benefit plans, the liability for pensions and other post-employment benefits is calculated at the present value of the future obligations (projected unit credit method). This actuarial method of calculation takes future trends in wages, salaries and retirement benefits into account. The majority of the recipients of pension benefits are located in Germany and the USA. The pension obligations are primar- ily financed via various external trust assets that are legally independent of Henkel. Active employees of Henkel in Germany participate in a defined contribution system, “Altersversorgung 2004 (AV 2004),” which was newly formed in 2004. AV 2004 is an employer-financed pension plan that reflects the personal income development of employees during their career at Henkel and thus provides a performance-related pension. Henkel guarantees a minimum return on the company’s con- tributions. The benefit essentially consists of an annuity pay- able upon attainment of the retirement age plus a lump-sum payment if the annuity threshold is exceeded in the employ- ee’s service period. In addition to age and disability pensions, the plan benefits include surviving spouse and surviving child benefits. Employees who started at Henkel after April 1, 2011, participate in the pension plan “Altersversorgung 2011 (AV 2011).” AV 2011 is an employer-financed, fund-linked retirement plan funded by contributions based on the income development of the employee. Henkel assures its employees that a lump-sum amount is available upon retirement which is at least equiva- lent to the level of principal contributions made by Henkel. Henkel makes the pension contribution to an investment fund established for the purpose of the company pension plan. Upon attaining retirement age, the employee can choose between an annuity through transfer of the superannuation lump-sum to a pension fund, or a one-time payment. To provide protection under civil law of the pension entitle- ments of future and current pensioners of Henkel AG & Co. KGaA against insolvency, we have transferred the proceeds of the bond issued in 2005 and certain other assets to Henkel Trust e.V. The trustee invests the cash with which it has been entrusted in the capital market in accordance with investment policies laid down in the trust agreement. In addition, we also subsidize medical benefits for active and retired employees resident mainly in the USA. Under these programs, retirees are reimbursed for a certain percentage of their medical expenses. We create provisions during the employees’ service period and pay the promised benefits when they are claimed. The subsidies for medical benefits that are attributable to active employees are expensed for each period and not included in the provisions for pensions and similar obligations. Disputes relating to health insurance commitments (self-insurance) are pending in the USA. They relate to issues surrounding the reimbursement of costs for certain medical treatments and whether these costs are refundable under reinsurance agreements. 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 136 Notes to the consolidated financial statements Henkel Annual Report 2017 The defined contribution plans are structured in such a way that the corporation 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 obligations regarding the payment of benefits to employees. The contribu- tions for defined contribution plans, excluding multi-em- ployer plans, for the reporting period amounted to 97 million euros (previous year: 103 million euros). In 2017, we paid 46 million euros to public sector institutions (previous year: 47 million euros) and 51 million euros to private sector institu- tions (previous year: 56 million euros). Multi-employer plans Henkel provides defined pension benefits that are financed by more than one employer. The ensuing multi-employer plans are treated as defined contribution plans because, due to the limited share of the contribution volume in the plans, the information available for each of the financing companies is insufficient for defined benefit accounting. In the Henkel Group, benefits from multi-employer plans are provided for employees primarily in the USA and Japan. Withdrawal from our multi-employer plans at the present time would incur a one-time expense of around 21 million euros (previous year: around 29 million euros). Payments into multi-employer plans in fiscal 2017 amounted to 1 million euros (previous year: 2 million euros). We expect contributions of around 1 million euros in fiscal 2018. Assumptions Group-wide, the obligations from our pension plans are valued by an independent external actuary at the end of the fiscal year. The calculations at the end of the fiscal year are based on the actuarial assumptions below. These are given as the weighted average. The mortality rates used are based on pub- lished statistics and experience relating to each country. In Germany, the assumptions are based on the “Heubeck 2005G” mortality table. In the USA, the assumptions are based on the modified “RP 2014” mortality table. The valuation of pension obligations in Germany is based essentially on the assumption of a 1.8 percent increase in retirement benefits (previous year: 1.8 percent). The discount rate is based on yields in the market for high- ranking corporate bonds on the respective date. The currency and term of the underlying bonds are aligned with the currency and expected maturities of the post-employment pension obligation. Actuarial assumptions in percent Discount rate Income trend Expected increases in costs for medical benefits in years Life expectancy at age 65 as of the valuation date for a person currently 65 years old 40 years old 1 Weighted average. Germany 2016 1.60 3.25 – 21.2 24.4 2017 1.70 3.25 – 21.3 24.5 USA 2016 4.10 3.00 6.80 22.0 23.0 2017 3.60 3.00 6.60 22.0 24.0 Other countries 1 2016 2.10 2.85 3.60 24.0 26.0 109 2017 2.15 3.10 3.85 23.6 25.8 Henkel Annual Report 2017 Notes to the consolidated financial statements 137 Development of defined benefit obligation at December 31, 2016 in million euros At January 1, 2016 Changes in the Group Translation differences Actuarial gains (–) / losses (+) of which: from changes in demographic assumptions of which: from changes in financial assumptions of which: from experience adjustments Current service cost Employee contributions Gains (–) / losses (+) arising from the termination and curtailment of plans Interest expense Retirement benefits paid out of plan assets Employer payments for pension obligations Other changes At December 31, 2016 of which: obligations not covered by plan assets of which: obligations covered by plan assets of which: obligations covered by reimbursement rights Development of plan assets at December 31, 2016 in million euros At January 1, 2016 Changes in the Group Translation differences Employer contributions Employee contributions Retirement benefits paid out of plan assets Planned income on plan assets Remeasurements in equity Other changes At December 31, 2016 Germany 2,966 USA Other countries 1,198 1,091 – 7 – 224 – 233 – 9 43 16 – 9 64 – 173 – 6 2 3,120 98 3,022 – Germany 2,577 – – 98 16 – 173 66 132 2 2,718 1 46 30 – 26 4 16 – – 48 – 69 – 33 – 1,237 182 940 115 – – 63 177 – 4 164 17 26 1 – 4 25 – 38 – 10 – 1 1,204 115 1,089 – USA Other countries 834 – 28 27 – – 69 34 17 – 871 921 – – 62 60 1 – 38 21 95 – 1 997 Development of asset ceiling at December 31, 2016 in million euros At January 1, 2016 Interest cost for asset ceiling Remeasurements in equity At December 31, 2016 Germany USA Other countries – – – – – – – – 7 – 1 8 110 Total 5,255 – 6 – 17 431 – 4 423 12 85 17 – 13 137 – 280 – 49 1 5,561 395 5,051 115 111 Total 4,332 – – 34 185 17 – 280 121 244 1 4,586 112 Total 7 – 1 8 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 138 Notes to the consolidated financial statements Henkel Annual Report 2017 Development of the net obligation at December 31, 2016 in million euros Net obligation at January 1, 2016 Recognized through profit or loss Current service cost Gains (–) / losses (+) arising from the termination and curtailment of plans Interest expense Recognized in other comprehensive income Actuarial gains (–) / losses (+) Remeasurements in equity Change in the effect of the asset ceiling Other items recognized in equity Employer payments Changes in the Group Translation differences Net obligation at December 31, 2016 Overfunding of pension obligations Recognized provision at December 31, 2016 Development of defined benefit obligation at December 31, 2017 in million euros At January 1, 2017 Changes in the Group Translation differences Actuarial gains (–) / losses (+) of which: from changes in demographic assumptions of which: from changes in financial assumptions of which: from experience adjustments Current service cost Employee contributions Gains (–) / losses (+) arising from the termination and curtailment of plans Interest expense Retirement benefits paid out of plan assets Employer payments for pension obligations Other changes At December 31, 2017 of which: obligations not covered by plan assets of which: obligations covered by plan assets of which: obligations covered by reimbursement rights Germany 389 USA Other countries 364 177 43 – 9 – 2 224 – 132 – – 104 – 7 – 402 – 402 Germany 3,120 10 0 – 38 – – 29 – 9 46 19 – 4 49 – 126 – 2 – 3,074 100 2,974 – 16 – 14 30 – 17 – – 60 1 18 366 18 384 26 – 4 4 177 – 95 1 – 70 – – 1 215 6 221 USA Other countries 1,237 1 – 154 71 – 8 73 6 14 – – 45 – 61 – 27 – 1,126 145 869 112 1,204 77 – 35 – 6 – 14 27 – 19 30 1 – 2 24 – 40 – 15 – 6 1,232 83 1,149 – 113 Total 930 85 – 13 16 431 – 244 1 – 234 – 6 17 983 24 1,007 114 Total 5,561 88 – 189 27 – 22 71 – 22 90 20 – 6 118 – 227 – 44 – 6 5,432 328 4,992 112 Henkel Annual Report 2017 Notes to the consolidated financial statements 139 Development of plan assets at December 31, 2017 in million euros At January 1, 2017 Changes in the Group Translation differences Employer contributions Employee contributions Retirement benefits paid out of plan assets Planned income on plan assets Remeasurements in equity Other changes At December 31, 2017 Development of asset ceiling at December 31, 2017 in million euros At January 1, 2017 Interest cost for asset ceiling Remeasurements in equity At December 31, 2017 Development of the net obligation at December 31, 2017 in million euros Net obligation at January 1, 2017 Recognized through profit or loss Current service cost Gains (–) / losses (+) arising from the termination and curtailment of plans Interest expense Recognized in other comprehensive income Actuarial gains (–) / losses (+) Remeasurements in equity Change in the effect of the asset ceiling Other items recognized in equity Employer payments Changes in the Group Translation differences Net obligation at December 31, 2017 Overfunding of pension obligations Recognized provision at December 31, 2017 Germany 2,718 – – 28 19 – 126 52 147 – 2,838 USA Other countries 871 – – 110 37 – – 61 33 48 – 818 997 44 – 27 47 1 – 40 18 22 – 6 1,056 115 Total 4,586 44 – 137 112 20 – 227 103 217 – 6 4,712 116 Germany USA Other countries Total – – – – – – – – 8 – 2 10 Germany 402 USA Other countries 366 215 46 – 4 – 3 – 38 – 147 – – 30 10 – 236 – 236 14 – 12 71 – 48 – – 64 1 – 44 308 19 327 30 – 2 6 – 6 – 22 2 – 62 33 – 8 186 11 197 8 – 2 10 117 Total 983 90 – 6 15 27 – 217 2 – 156 44 – 52 730 30 760 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 140 Notes to the consolidated financial statements Henkel Annual Report 2017 Analysis of reimbursement rights in million euros At January 1 Changes in the Group Translation differences Employer contributions Employee contributions Retirement benefits paid Interest income Remeasurements in equity At December 31 118 2017 115 – – 11 8 – – 12 4 8 112 2016 111 – 5 3 – – 8 5 – 1 115 The total present value (defined benefit obligation – DBO) is comprised of: • 1,881 million euros (previous year: 1,960 million euros) for active employees, • 914 million euros (previous year: 930 million euros) for former employees with vested benefits, and • 2,637 million euros (previous year: 2,671 million euros) for retirees. The average weighted duration of pension obligations is 15 years (previous year: 16 years) for Germany, 9 years (previ- ous year: 9 years) for the USA and 19 years (previous year: 20 years) for other countries. In determining net liability, we take into account amounts that are not recognized due to asset ceiling restrictions. If the fair value of the plan asset item exceeds the obligations arising from the pension benefits, an asset is recognized only if the reporting entity can also derive economic benefit from these assets, for example in the form of return flows or a future reduction in contributions (Asset Ceiling per IAS 19.58 ff.). In the reporting period, we recorded an amount of 10 million euros as the asset ceiling (previous year: 8 million euros). Within our consolidated statement of income, current service costs are allocated on the basis of cost of sales to the respective function. Only the net of interest expense for the present value of obligations and interest income from plan assets is reported in the interest result. All gains / losses from the termination and curtailment of plans have been recognized in other operat- ing income / expenses. The employer contributions in respect of state pension provisions are included as “Social security contributions and staff welfare costs” under Note 33 on page 167. In 2017, allocations to the pension fund amounted to 112 million euros (previous year: 185 million euros). The reimbursement rights covering a portion of the pension obligations in the USA are assets that do not fulfill the defini- tion of plan assets as stated in IAS 19. The reimbursement rights indicated are available to the Group in order to cover the expenditures required to fulfill the respective pension obligations. Reimbursement rights and the associated pension obligations must, according to IAS 19, be shown unnetted in the statement of financial position. Payments into pension funds in fiscal 2018 are expected to total 56 million euros. Analysis of plan assets in million euros Shares Europe USA Others Bonds and hedging instruments Government bonds Corporate bonds Derivatives Alternative investments Cash Liabilities 1 Other assets Total At December 31, 2016 At December 31, 2017 Quotation on active markets No quotation on active markets Total Quotation on active markets No quotation on active markets 1,407 646 229 532 3,086 1,048 2,038 – – – – – 4,493 – – – – 5 – – 5 275 104 – 501 210 93 1,407 646 229 532 3,091 1,048 2,038 5 275 104 – 501 210 4,586 1,476 709 177 590 3,307 1,260 2,047 – – – – – 4,783 – – – – – 28 – – – 28 254 106 – 605 202 – 71 119 Total 1,476 709 177 590 3,279 1,260 2,047 – 28 254 106 – 605 202 4,712 1 Liability to Henkel AG & Co. KGaA from the assumption of pension payments for Henkel Trust e.V. Henkel Annual Report 2017 Notes to the consolidated financial statements 141 Plan assets by country 2017 120 Classification of bonds by rating 2017 121 USA 17 % Germany 60 % Non-investment grade 4 % Investment grade 96 % Other countries 23 % The objective of the investment strategy for the global plan assets is the long-term security of pension payments. This is ensured by comprehensive risk management that takes into account the asset and liability portfolios of the defined benefit pension plans. Henkel pursues a liability-driven investment (LDI) approach in order to achieve the investment objective. This approach takes into account the structure of the pension obligations and manages the cover ratio of the pension plans. In order to improve the funding ratio, Henkel invests plan assets in a diversified portfolio for which the expected long- term yield is above the interest costs of the pension obligations. In order to cover the risks arising from trends in wages, salaries and life expectancies, and to close the potential deficit between plan assets and pension obligations over the long term, addi- tional investments are made in a return-enhancing portfolio as an add-on instrument that contains assets such as equities, private equity and real estate. The target portfolio structure of the plan assets is essentially determined in asset-liability studies. These studies are conducted regularly with the help of external advisors who assist Henkel in the investment of plan assets. They examine the actual portfolio structure, taking into account current capital market conditions, investment principles and the obligation structure, and can suggest adjustments be made to the portfolio. The expected long-term yield for individual plan assets is derived from the target portfolio structure and the expected long-term yields for the individual asset classes. Major plan assets are administered by external fund managers in Germany and the USA. These countries pursue the above investment strategies and are monitored centrally. At Decem- ber 31, 2017, other assets making up the plan assets included the present value of a non-current receivable of 62 million euros (previous year: 64 million euros) relating to claims per- taining to a hereditary building lease assigned by Henkel AG & Co. KGaA to Henkel Trust e.V. Also shown here is a claim of 106 million euros (previous year: 115 million euros) against BASF Personal Care & Nutrition GmbH (formerly Cognis GmbH) for indemnification of pension obligations. This claim represents the nominal value, which is equivalent to the market price. In the reporting year, as in the previous year, we held no direct investments and no treasury shares in respect of plan assets in the portfolio. Risks associated with pension obligations Our internal pension risk management monitors the risks of all pension plans Group-wide in compliance with local legal regulations. As part of the monitoring process, guidelines on the control and management of risks are adopted and continu- ously developed; these guidelines mainly govern external funding, portfolio structure and actuarial assumptions. The objective of the financing strategy within the Group is to ensure that plan assets cover 90 to 100 percent of the present value of the funded pension obligations. The contributions and investment strategies are intended to ensure nearly com- plete coverage of the plans for the duration of the pension obligations. 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 142 Notes to the consolidated financial statements Henkel Annual Report 2017 Henkel’s pension obligations are exposed to various market risks. These risks are counteracted by the degree of external funding and the structure of pension benefits. The risks relate primarily to changes in market interest rates, inflation, and life expectancy, as well as general market fluctuations. Pen- sion obligations based on contractual provisions in Germany generally entail lifelong benefits payable when the employee reaches retirement age or in the case of incapacity or death. In order to reduce the risks arising from the payment of life- long benefits as well as inflation, pension benefits have been gradually converted since 2004 to what are known as modular benefits with a pension option, with the fund available being initially divided into an annuity and lump-sum portion. Newly hired employees since 2011 receive a commitment based primarily on the lump-sum benefit. Generally, lump-sum benefits may also be paid out as an annuity through a pension fund. All benefits in Germany are financed through a provi- dent fund (Vorsorgefonds) established for the purpose of the occupational pension plan. Benefits for new employees since 2011 as well as a portion of the entitlements vested since 2004 are linked to the performance of this provident fund, resulting in a reduction in overall risk to the Group. The described adjustments within the pension structure reduce the financial risk arising from pension commitments in Germany. By link- ing the benefit to the capital investment, the net risk is also largely eliminated. An increase in the long-term inflation assumption would mainly affect the expected increase in pensions and the expected trend in pension-eligible salaries. The pension obligations in the USA are based primarily on three retirement plans that are all closed to new employees. New employees receive pension benefits based on a defined contribution plan. The pension benefits generally have a lump-sum option which is usually exercised. When a pension becomes payable, the amount of the annuity granted is deter- mined on the basis of current market interest rates. As a result, the impact of a change to the interest rate used in the calcula- tion is low compared to pension commitments entailing life- long benefits. Additionally, in the USA, pensions paid once are not adjusted by amount, thus there are no direct risks during the pension payment period arising from pending annuity adjustments. Inflation risks therefore result mainly from the salary adjustments awarded. In addition to the pension obligation risks already presented, there are specific risks associated with multi-employer plans. In the Henkel Group, these essentially relate to the USA. The contributions to these plans are raised mainly through an allo- cation process based on the pension-eligible income of active employees. Restructuring contributions may also be made in order to close gaps in coverage. The risks of such plans arise largely from higher future contributions to close coverage gaps or through discontinuation by other companies obligated to make contributions. The effects of changes to assumptions with respect to medical benefits for employees and retirees in the USA are shown in the sensitivities analysis. The analysis of our Group-wide pension obligations revealed no extraordinary risks. Cash flows and sensitivities In the next five financial years, the following payments from pension plans are expected: Future payments for pension benefits in million euros Germany 2018 2019 2020 2021 2022 141 128 129 132 132 USA 121 94 92 91 88 Other countries 36 33 35 36 36 122 Total 298 255 256 259 256 The future level of the funded status and thus of the pension obligations depends on the development of the discount rate, among other factors. Companies based in Germany and the USA account for 77 percent of our pension obligations. The medical costs for employees of our subsidiaries in the USA which are incurred after retirement are also recognized in the pension obligations for defined benefit plans. A rate of increase of 6.6 percent (previous year: 6.8 percent) was assumed for the medical costs. We expect this rate of increase to fall gradually to 4.5 percent by 2037 (previous year: 4.5 percent by 2037). The effects of a change in material actuarial assumptions for the present value of pension obligations are as follows: Henkel Annual Report 2017 Notes to the consolidated financial statements 143 Sensitivities – Present value of pension obligations at December 31, 2016 in million euros Present value of obligations In the event of: Increase in the discount rate by 0.5 pp Reduction of the discount rate by 0.5 pp Rise in future income increases by 0.5 pp Reduction of future income increases by 0.5 pp Rise in retirement benefits increases by 0.5 pp Reduction of retirement benefits increases by 0.5 pp Rise in medical costs by 0.5 pp Reduction of medical costs by 0.5 pp pp = percentage points Sensitivities – Present value of pension obligations at December 31, 2017 in million euros Present value of obligations In the event of: Increase in the discount rate by 0.5 pp Reduction of the discount rate by 0.5 pp Rise in future income increases by 0.5 pp Reduction of future income increases by 0.5 pp Rise in retirement benefits increases by 0.5 pp Reduction of retirement benefits increases by 0.5 pp Rise in medical costs by 0.5 pp Reduction of medical costs by 0.5 pp pp = percentage points Germany 3,120 2,903 3,364 3,119 3,118 3,280 2,970 3,118 3,118 Germany 3,074 2,875 3,299 3,074 3,073 3,234 2,928 3,074 3,074 USA Other countries 1,237 1,187 1,293 1,242 1,230 1,235 1,235 1,238 1,232 1,204 1,091 1,338 1,232 1,180 1,287 1,140 1,205 1,205 USA Other countries 1,126 1,088 1,185 1,139 1,128 1,133 1,133 1,136 1,131 1,232 1,122 1,356 1,254 1,208 1,307 1,170 1,232 1,230 123 Total 5,561 5,181 5,995 5,593 5,528 5,802 5,345 5,561 5,555 124 Total 5,432 5,085 5,840 5,467 5,409 5,674 5,231 5,442 5,435 The extension of life expectancy in Germany by one year would increase the present value of pension obligations by 4 percent (previous year: 4 percent). It should be noted with respect to the sensitivities presented that, due to mathematical effects, the percentage change is not and does not need to be linear. Thus the percentage increases and decreases do not vary by the same absolute amount. Each sensitivity is independently calculated and is not subject to scenario analysis. 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 144 Notes to the consolidated financial statements Henkel Annual Report 2017 16 Income tax provisions and other provisions Development in 2017 in million euros Income tax provisions of which: non-current of which: current Restructuring provisions of which: non-current of which: current Sundry provisions of which: non-current of which: current Total of which: non-current of which: current At January 1, 2017 Acquisitions Utilized Released Added Other changes 464 106 358 265 58 207 2,048 289 1,759 2,777 453 2,324 6 0 6 1 1 0 45 5 40 52 6 46 – 181 0 – 181 – 130 – 12 – 118 – 1,457 – 47 – 1,410 – 1,768 – 59 – 1,709 – 11 0 – 11 – 26 – 3 – 23 – 167 – 7 – 160 – 204 – 10 – 194 189 – 76 265 128 20 108 1,457 70 1,387 1,774 14 1,760 – 3 – 3 0 – 14 1 – 15 – 56 – 37 – 19 – 73 – 39 – 34 125 At December 31, 2017 464 27 437 224 65 159 1,870 273 1,597 2,558 365 2,193 Provisions are recognized for obligations toward third parties where the outflow of resources is probable and the expected obligation can be reliably estimated. Provisions are measured to the best estimate of the expenditures required in order to meet the current obligation as of the reporting date. Price increases expected to take place prior to the time of performance are included in the calculation. Provisions in which the interest effect is material are discounted to the reporting date at a pre-tax interest rate. For obligations in Germany, we have applied interest rates of between –0.1 and 2.2 percent (previous year: –0.1 and 2.3 percent). Provisions are recognized in respect of restructuring measures, provided that work has begun on the implementation of a detailed, formal plan or such a plan has already been commu- nicated. Additions to the restructuring provisions are related to the optimization of our distribution structures and to the integration of our acquisitions. The provisions for obligations arising from our sales activities cover expected burdens in the form of subsequent reductions in already generated revenues, and risks arising from pending transactions. The income tax provisions comprise accrued tax liabilities and amounts set aside for the outcome of external tax audits. Provisions for payroll obligations essentially cover expendi- tures likely to be incurred by the Group for variable, perfor- mance-related remuneration components. Other provisions include identifiable obligations toward third parties. They are measured at total cost. Other changes in provisions include changes in the scope of consolidation, movements in exchange rates, compounding effects, and adjustments to reflect changes in maturity as time passes. Provisions for obligations in the production and engineering sphere relate primarily to provisions for warranties. Henkel Annual Report 2017 Notes to the consolidated financial statements 145 Analysis of sundry provisions by function 126 in million euros Sales of which: non-current of which: current Payroll of which: non-current of which: current Production and engineering of which: non-current of which: current Various sundry obligations of which: non-current of which: current Total of which: non-current of which: current At December 31, 2016 At December 31, 2017 977 10 967 691 199 492 45 20 25 335 60 275 2,048 289 1,759 944 8 936 583 158 425 44 20 24 299 87 212 1,870 273 1,597 Risks arising from legal disputes and proceedings Provisions have been made for individual risks arising from civil disputes in the amount of probable claims plus associated procedural costs. A euro amount in the double-digit millions range has been accrued for claims arising from product liability actions in the USA. In accordance with IAS 37.92, further disclosures with respect to the proceedings and their related risks to Henkel have not been made in order to refrain from interference with their outcome. On December 18, 2014, in an action relating to infringements between 2003 and 2006, the French antitrust authorities imposed fines amounting to around 951 million euros in total against various international companies in the cosmetic and detergent industries. Henkel received a fine of 109 million euros, which was paid provisionally on May 15, 2015. A final decision on the appeal filed by Henkel with regard to the amount of the fine is still pending. Henkel and its Group companies are also defendants in or parties to other judicial, arbitrational, and official proceedings. The course and outcomes of legal disputes are inherently uncertain and unpredictable. Based on the knowledge currently available, no negative future impact, material or otherwise, on the net assets, financial position and results of operations of the corporation is expected. 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 146 Notes to the consolidated financial statements Henkel Annual Report 2017 17 Borrowings Borrowings in million euros Bonds Commercial paper 1 Liabilities to banks 2 Other borrowings Total At December 31, 2016 At December 31, 2017 Non-current Current 2,254 – 1,042 4 3,300 4 381 40 – 425 Total 2,258 381 1,082 4 3,725 Non-current Current 2,157 – 916 3 3,076 509 729 30 – 1,268 1 From the euro and US dollar commercial paper program (total volume: 2 billion US dollars and 1 billion euros). 2 Obligations with floating rates of interest or interest rates pegged for less than one year. 127 Total 2,666 729 946 3 4,344 128 Bonds Issuer Type Nominal value Carrying amounts excluding accrued interest Market values excluding accrued interest 1 Market values including accrued interest 1 Interest rate Maturity in million euros 2016 2017 2016 2017 2016 2017 Henkel AG & Co. KGaA Henkel AG & Co. KGaA Henkel AG & Co. KGaA Bond Bond Bond 500 million euros 700 million euros 750 million US dollars Henkel AG & Co. KGaA Bond 300 million GB pounds 2 Henkel AG & Co. KGaA Bond 600 million US dollars 499 698 709 348 – 500 698 624 336 499 501 699 707 344 – 501 700 619 335 498 501 699 710 345 – 2016 0 % p.a. 0 % p.a. 2017 0 % p.a. 9/13/2018 0 % p.a. 9/13/2021 1.5 % p.a. 1.5 % p.a. 9/13/2019 501 700 622 336 0.875 % p.a. 0.875 % p.a. 9/13/2022 503 – 2.0 % p.a. 6/12/2020 Total bonds 2,254 2,657 2,251 2,653 2,255 2,662 1 Market value of the bonds derived from the stock market price at December 31. 2 A cross-currency swap is in place to convert the interest and principal payments on the bond denominated in British pounds into euro payments. Henkel issued a fixed-rate bond with a volume of 600 million US dollars in June 2017 to finance its acquisitions of 2017. Interest rate swaps were used in fiscal 2017 to convert into fixed-rate payments the floating-rate interest payments in US dollars that are due for the 1.1 billion US dollar syndicated bank loan recognized under liabilities to banks. Henkel Annual Report 2017 Notes to the consolidated financial statements 147 18 Other financial liabilities Analysis 129 in million euros Non-current Current Total Non-current Current Total At December 31, 2016 At December 31, 2017 Liabilities to non-consolidated affiliated companies and associated companies Liabilities to customers Derivative financial instruments Sundry financial liabilities Total – – 13 133 1 146 7 58 64 35 164 7 58 77 136 310 – – 28 57 85 7 45 72 90 214 7 45 100 147 299 1 Adjusted following final allocation of the purchase price for the acquisition of The Sun Products Corporation, which resulted in an increase of 32 million euros. Of the liabilities to non-consolidated affiliated companies and associated companies, 7 million euros (previous year: 7 million euros) is attributable to non-consolidated affiliated companies. Included in the sundry financial liabilities are outstanding purchase price liabilities of 52 million euros relating to the acquisition of the Darex Packaging Technologies business, as well as the contingent purchase price liability of 27 million euros relating to our acquisition in Nigeria (previous year: 75 million euros) and liabilities from finance leases of 13 million euros (previous year: 17 million euros). 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 148 Notes to the consolidated financial statements Henkel Annual Report 2017 19 Other liabilities Analysis in million euros Other tax liabilities Liabilities to employees Liabilities relating to employee deductions Liabilities in respect of social security Sundry other liabilities Total At December 31, 2016 At December 31, 2017 Non-current – 6 – – 19 25 Current 211 41 62 23 58 395 Total 211 47 62 23 77 420 Non-current – 7 – – 10 17 Current 178 37 44 24 57 340 130 Total 178 44 44 24 67 357 The sundry other liabilities primarily comprise various income deferrals for other accounting periods amounting to 22 million euros (previous year: 29 million euros) and payments on account received in the amount of 5 million euros (previous year: 10 million euros). 20 Trade accounts payable Trade accounts payable increased from 3,665 million euros to 3,717 million euros. In addition to purchase invoices, they also relate to accruals for invoices outstanding in respect of goods and services received. They are all due within one year. Henkel Annual Report 2017 Notes to the consolidated financial statements 149 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events 21 Financial instruments report 131 Financial instruments Financial assets Financial liabilities Equity Amortized cost Fair value Amortized cost Fair value Cost Statement of income Other comprehen- sive income Fair value option Held for trading Loans and receivables Held to maturity Fair value option Held for trading Available for sale Categories used by Henkel Financial instruments explained by category A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Within the Henkel Group, financial instruments are reported within the statement of financial position under trade accounts receivable, trade accounts payable, borrowings, other financial assets, other financial liabilities, and cash and cash equivalents. Financial instruments are recognized once Henkel becomes a party to the contractual provisions of the financial instrument. The recognition of financial assets takes place at the settlement date, with the exception of derivative financial instruments, which are recognized on the transaction date. All financial instruments are initially reported at their fair value. Trans action costs are only capitalized if the financial instruments are not subsequently remeasured to fair value through profit or loss. For subsequent remeasurement, financial instruments are divided into the following classes in accordance with IAS 39: • Financial instruments measured at amortized cost • Financial instruments measured at fair value Different valuation categories are allocated to these two classes. Financial instruments assigned to the valuation categories “Available for sale” and “Held for trading” are generally measured at fair value. Other securities and time deposits as well as other investments which are not measured using the equity method, both part of other financial assets in the state ment of financial position, are categorized as “Available for sale.” Only the derivative financial instruments held by the Henkel Group which are not included in hedge accounting are designated as “Held for trading.” We recognize all other financial instruments including the financial assets categorized as “Loans and receivables” at amortized cost using the effective interest method. The measurement categories “Held to maturity” and “Fair value option” are not currently used within the Henkel Group. 150 Notes to the consolidated financial statements Henkel Annual Report 2017 The derivative financial instruments that are not included in a designated hedging relationship are categorized as “Held for trading” and recognized at their fair value. All fair value changes are recognized through profit or loss. Hedge accounting is applied in individual cases – where possible and economically sensible – in order to avoid profit and loss variations arising from fair value changes in derivative financial instruments. Fair value and cash flow hedges are designated within the Group depending on the type of underlying and the risk being hedged. Details relating to the hedging contracts transacted within the Group and how the fair values of the derivatives are determined are provided on pages 153 to 156. All financial liabilities – with the exception of derivative financial instruments and the contingent purchase price lia- bility relating to our acquisition in Nigeria – are essentially recognized at amortized cost using the effective interest method. Borrowings for which a hedging transaction has been con- cluded that meets the requirements of IAS 39 with respect to a designated hedging relationship are recognized according to hedge accounting rules. The financial instruments in the measurement category “Loans and receivables” are non-derivative financial instru- ments. They are characterized by fixed or determinable pay- ments and are not traded in an active market. Within the Henkel Group, this category is mainly comprised of trade accounts receivable, cash and cash equivalents, and other financial assets with the exception of investments, deriva- tives, securities and time deposits. The carrying amounts of the financial instruments categorized as “Loans and rec eivables” closely approximate their fair value due to their predominantly short-term nature. If there are doubts as to the realizability of these financial instruments, they are recognized at amortized cost less appropriate valuation allowances. Financial instruments in the category “Available for sale” are non-derivative financial assets and are recognized at fair value, provided that this is reliably determinable. If the fair value cannot be reliably determined, they are recognized at cost. Value changes between the reporting dates are essentially recognized in equity through comprehensive income (avail- able-for-sale reserve) without affecting profit or loss, unless the cause lies in permanent impairment. Impairment losses are recognized through profit or loss. When the asset is derecognized, the amounts recognized in the revaluation reserve are released through profit or loss. In the Henkel Group, the securities and time deposits recognized under other financial assets are categorized together with other investments as “Available for sale.” The fair values of the secu- rities and time deposits are based on quoted market prices or derived from market data. As the fair values of other invest- ments cannot be reliably determined, they are measured at amortized cost. Henkel is currently not planning to sell any of the financial instruments recognized under other investments. Henkel Annual Report 2017 Notes to the consolidated financial statements 151 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Carrying amounts and fair values of financial instruments 132 At December 31, 2016 in million euros Assets Loans and receivables Trade accounts receivable Other financial assets Receivables from associated companies Financial receivables from third parties Receivables from Henkel Trust e.V. Sundry financial assets Cash and cash equivalents Financial assets available for sale Other financial assets Other investments Floating-interest securities (level 2) Financial collateral provided (level 1) Financial assets held for trading (level 2) Derivative financial instruments not included in a designated hedging relationship Derivative financial instruments included in a designated hedging relationship (level 2) Total Liabilities Amortized cost Trade accounts payable Borrowings without a hedging relationship Other financial liabilities Financial liabilities held for trading (level 2) Derivative financial instruments not included in a designated hedging relationship Derivative financial instruments included in a designated hedging relationship (level 2) Other financial liabilities (level 3) Sundry financial liabilities Total 1 Measured at amortized cost; see explanatory notes on page 119. Valuation according to IAS 39 Amortized cost Carrying amount December 31 Fair value, through other comprehensive income Fair value, through profit or loss Fair value December 31 5,392 3,349 654 5 38 501 110 5,392 3,349 654 5 38 501 110 1,389 1,389 65 65 56 2 7 72 72 31 56 56 56 – – – – – 5,560 5,448 7,516 3,665 3,725 126 68 68 9 75 75 7,516 3,665 3,725 126 – – – – – 7,668 7,516 – – – – – – – – 9 9 – 2 7 – – 31 40 – – – – – – 9 75 75 84 – – – – – – – – – – – – – 72 72 – 72 – – – – 68 68 – – – 68 5,392 3,349 654 5 38 501 110 1,389 65 65 56 1 2 7 72 72 31 5,560 7,513 3,665 3,722 126 68 68 9 75 75 7,665 152 Notes to the consolidated financial statements Henkel Annual Report 2017 Carrying amounts and fair values of financial instruments 133 At December 31, 2017 in million euros Assets Loans and receivables Trade accounts receivable Other financial assets Receivables from associated companies Financial receivables from third parties Receivables from Henkel Trust e.V. Sundry financial assets Cash and cash equivalents Financial assets available for sale Other financial assets Other investments Floating-interest securities (level 2) Financial collateral provided (level 1) Financial assets held for trading (level 2) Derivative financial instruments not included in a designated hedging relationship Derivative financial instruments included in a designated hedging relationship (level 2) Total Liabilities Amortized cost Trade accounts payable Borrowings without a hedging relationship Other financial liabilities Financial liabilities held for trading (level 2) Derivative financial instruments not included in a designated hedging relationship Derivative financial instruments included in a designated hedging relationship (level 2) Other financial liabilities (level 3) Sundry financial liabilities Total 1 Measured at amortized cost; see explanatory notes on page 119. Valuation according to IAS 39 Amortized cost Carrying amount December 31 Fair value, through other comprehensive income Fair value, through profit or loss Fair value December 31 5,255 3,544 795 1 26 605 163 916 262 262 22 203 37 54 54 10 5,255 3,544 795 1 26 605 163 916 22 22 22 – – – – – 5,581 5,277 8,233 3,717 4,344 172 61 61 39 27 27 8,233 3,717 4,344 172 – – – – – 8,360 8,233 – – – – – – – – 240 240 – 203 37 – – 10 250 – – – – – – 39 27 27 66 – – – – – – – – – – – – – 54 54 – 54 – – – – 61 61 – – – 61 5,255 3,544 795 1 26 605 163 916 262 262 22 1 203 37 54 54 10 5,581 8,229 3,717 4,340 172 61 61 39 27 27 8,356 The following hierarchy is applied in order to determine and disclose the fair value of financial instruments: • Level 1: Fair values which are determined on the basis of quoted, unadjusted prices in active markets. • Level 2: Fair values which are determined on the basis of parameters for which either directly or indirectly derived market prices are available. • Level 3: Fair values which are determined on the basis of parameters for which the input factors are not derived from observable market data. The fair value of securities and time deposits classified as level 1 is based on the quoted market prices on the reporting date. Observable market data are used to measure the fair value of level 2 securities. If bid and ask prices are available, the mid price is used to determine the fair value. When using the discounted cash flow method to determine fair values, the contractually specified cash flows are discounted using currency- specific yield curves. When measuring derivative financial instruments, the credit risk is determined by netting all finan- cial assets, liabilities, collateral received and collateral provided for each counterparty to determine the net credit exposure. Henkel Annual Report 2017 Notes to the consolidated financial statements 153 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events The fair value of the contingent purchase price liability reported under other financial liabilities that resulted from our acquisition in Nigeria is classified as level 3. The fair value of the contingent purchase price liability as of January 1, 2017, was 75 million euros. As a result of remeasurement as of December 31, 2017, this figure was adjusted by 48 million euros to 27 million euros. The net result of “Loans and receivables” is attributable in full to interest income. Net income arising from additions and releases of valuation allowances amounting to 1 million euros (previous year: –25 million euros) and income from payments on financial instruments already written off and derecognized amounting to 0 million euros (previous year: 1 million euros) were recognized in operating profit. The measurement effects were recognized directly in equity and reported in the statement of changes in equity as other changes in equity. The fair value was determined using the discounted cash flow method, taking into account the free cash flow of the acquired company based on a detailed plan- ning horizon up to 2025. A discount rate was applied as derived from the capital costs in euros. A further material valuation parameter – in addition to the terminal growth rate reflected in the perpetual annuity of 1.5 percent and the weighted average cost of capital (WACC) of 11.5 percent that was used as the discount rate – is the exchange rate of the Nigerian naira. A rise in interest rates or a depreciation of the naira would result in a lower negative fair value of the liability. An interest rate reduction or an appreciation of the naira would result in a higher negative fair value. We did not perform any reclassifications between the valuation categories or transfers within the fair value hierarchy either in fiscal 2017 or in the previous year. Net gains and losses from financial instruments by category The net gains and losses from financial instruments can be allocated to the following categories: Net results of the measurement categories and reconciliation to financial result 134 in million euros Loans and receivables Financial assets available for sale Financial assets and liabilities held for trading including derivatives in a designated hedging relationship Financial liabilities measured at amortized cost Total net results Foreign exchange effects Interest expense of pension obligations less inter- est income from plan assets and reimbursement rights Other financial result (not related to financial instruments) Financial result 2016 2017 19 0 65 – 29 55 – 74 – 11 – 3 – 33 18 0 – 385 – 61 – 428 402 – 11 – 14 – 51 The net result from securities and time deposits classified as “Available for sale” amounts to 0 million euros (previous year: 0 million euros) for interest income, 0 million euros (previous year: 0 million euros) for income from sales and 0 million euros (previous year: 0 million euros) for income from other investments. As was also the case in 2016, the measurement of these financial instruments at fair value did not result in rec- ognition of a gain or loss in equity. The net result from “Held for trading” financial instruments and derivatives in a designated hedging relationship includes, in addition to the outcome of measurement of these deriva- tives at fair value amounting to –389 million euros (previous year: 66 million euros), income of 2 million euros arising from the reversal of the valuation allowance made for counterparty credit risk (previous year: –2 million euros). Moreover, 2 mil- lion euros of interest income and expenses from interest rate and currency derivatives and amounts recycled from cash flow hedges recognized in equity are also included under this head- ing (previous year: 1 million euros). The net result from “Financial liabilities measured at amor- tized cost” is essentially derived from the interest expense for borrowings amounting to –57 million euros (previous year: –25 million euros). Fees amounting to –4 million euros for procuring money and loans were also recognized under this heading (previous year: –4 million euros). The realization and valuation of financial assets and liabilities in foreign currencies (without derivative financial instruments) resulted in income of 402 million euros (previous year: –74 million euros). Derivative financial instruments Derivative financial instruments are measured at their fair value at the reporting date. Recognition of the gains and losses arising from fair value changes of derivative financial instru- ments is dependent upon whether the requirements of IAS 39 are fulfilled with respect to hedge accounting. Hedge accounting is not applied to the large majority of deriv- ative financial instruments. We recognize through profit or loss the fair value changes in these derivatives which, in eco- nomic terms, represent effective hedges within the framework of Group strategy. These are largely compensated by fair value changes in the hedged items. In hedge accounting, derivative 154 Notes to the consolidated financial statements Henkel Annual Report 2017 financial instruments are qualified as instruments for hedging the fair value of a recognized underlying (“fair value hedge”), as instruments for hedging future cash flows (“cash flow hedge”) or as instruments for hedging a net investment in a foreign entity (“hedge of a net investment in a foreign entity”). The following table provides an overview of the derivative financial instruments utilized and recognized within the Group, and their fair values: Derivative financial instruments At December 31 in million euros Forward exchange contracts 1 (of which: for hedging loans within the Group) (of which: designated as cash flow hedge) Foreign exchange options 1 Interest rate swaps 3 (of which: designated as cash flow hedge) Cross-currency swaps 4 (of which: designated as cash flow hedge) Equity forward contracts (of which: designated as cash flow hedge) Total derivative financial instruments Nominal value Positive fair value 2 Negative fair value 2 135 2016 4,000 (2,433) (657) 1 – – 350 – 167 147 4,518 2017 4,899 (2,710) (554) 8 917 (917) 338 (338) 128 128 6,290 2016 80 (53) (11) – – – – – 23 20 103 2017 61 (48) (7) – 3 (3) – – – – 64 2016 – 64 (– 44) (–9) – – – – 13 – – – – 77 2017 – 68 (– 49) (– 7) – – – –21 (– 21) – 11 (– 11) – 100 136 1 Maturity less than 1 year. 2 Fair values including accrued interest and excluding valuation allowance for counterparty credit risk of 0 million euros (previous year: 2 million euros). 3 Nominal value: 1.1 billion US dollars. 4 Nominal value: 300 million British pounds. We determine the fair value of forward exchange contracts and cross-currency swaps on the basis of the reference rates issued by the European Central Bank for the reporting date, taking into account forward premiums / forward discounts for the remain- ing term of the respective contract versus the contracted foreign exchange rate. Foreign exchange options are measured using price quotations or recognized models for the determination of option prices. The fair value of equity forward contracts is mea- sured on the basis of the closing price of Henkel preferred shares on the reporting date, taking into account forward pre- miums / forward discounts for the remaining term of the respective contract versus the contracted forward share price. Interest rate hedges are measured on the basis of discounted cash flows expected in the future, taking into account market interest rates applicable for the remaining term of the contracts. These are indicated for the two most important currencies in the following table. It shows the interest rates quoted on the interbank market in each case on December 31. Interest rates in percent p.a. At December 31 Term 1 month 3 months 6 months 1 year 2 years 5 years 10 years Euro US dollar 2016 – 0.37 – 0.32 – 0.22 – 0.08 – 0.16 0.08 0.66 2017 – 0.37 – 0.33 – 0.27 – 0.19 – 0.15 0.31 0.89 2016 2017 0.77 1.00 1.32 1.69 1.46 1.96 2.32 1.56 1.69 1.84 2.11 2.08 2.25 2.40 In measuring derivative financial instruments, counterparty credit risk is taken into account with an adjustment to the fair values concerned, determined on the basis of credit risk pre- miums. The adjustment relating to fiscal 2017 amounts to 0 million euros (previous year: 2 million euros). The reversal was recognized in profit or loss under financial result. Henkel Annual Report 2017 Notes to the consolidated financial statements 155 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Depending on their fair value and their maturity on the report- ing date, derivative financial instruments are included in financial assets (positive fair value) or in financial liabilities (negative fair value). Most of the forward exchange contracts serve to hedge risks arising from trade accounts receivable and payable, and those pertaining to Group financing. Fair value hedges: A fair value hedge hedges the fair value of recognized assets and liabilities. The change in the fair value of the derivatives and the change in the fair value of the underlying resulting from the hedged risk are simultaneously recognized in profit or loss. The Henkel Group did not use any fair value hedges in fiscal 2017 nor in fiscal 2016. Cash flow hedges: A cash flow hedge hedges fluctuations in future cash flows from recognized assets and liabilities, and also transactions that are either planned or highly probable, or firmly contracted unrecognized financial commitments, from which an interest-rate, currency, or share price risk arises. The effective portion of a cash flow hedge is recognized through the hedge reserve in equity. The ineffective portion arising from the change in value of the hedging instrument is recognized through profit or loss in the financial result or operating profit, depending on the underlying. The gains and losses recorded in equity are subsequently recognized through profit or loss in the period in which the results are affected by the hedged transaction. Cash flow hedges (after income taxes) 137 End balance Initial balance Addition (recognized in equity) Disposal (recognized through profit or loss) – 215 – 215 – 10 31 – 8 – 31 – 233 – 215 in million euros 2017 2016 The initial value of the cash flow hedges recognized in equity relates substantially to currency hedges for past acquisitions and for planned materials purchases. An addition of 1 million euros after income taxes relates to currency hedges of planned inventory purchases against fluc- tuations in spot rates. Of the gains recognized in equity, 4 mil- lion euros was reclassified to operating profit in the reporting period. The positive and negative fair values of the derivatives contracted as a currency hedge of planned inventory purchases amounted to 7 million and –7 million euros respectively. The cash flows from the currency derivatives and the cash flows from the hedged inventory purchases are expected to occur and affect profit or loss in the next fiscal year. An addition after income taxes of 3 million euros resulted from the hedges to protect planned payments relating to our long-term incentive (LTI) scheme – some of which were made in the course of the fiscal year just ended – against fluctuations in Henkel share prices. Of the gains recognized in equity, 4 million euros were reclassified to operating profit in the reporting period. The negative fair values of the equity forward contracts totaled 11 million euros. The cash flows relating to these derivatives will occur during the next fiscal year, as will the cash flows from the hedged LTI payments. A cross-currency swap was used to convert into euro payments the future interest and principal payment obligations relating to the 300 million British pound bond that we issued in 2016. An addition of 1 million euros after income taxes relates to hedges of future interest payments. The negative fair value of the cross-currency swap amounted to 21 million euros. The cash flows from the cross-currency swap that are attributable to the interest payments were recognized proportionately through profit or loss as an interest expense in the reporting period. Interest rate swaps were used in fiscal 2017 to convert into fixed-rate payments the floating-rate interest payments in US dollars that are due for the 1.1 billion US dollar syndicated bank loan recognized under liabilities to banks. An addition of 2 million euros after income taxes relates to these hedges. The positive fair values of the interest rate swaps amounted to 3 million euros. The cash flows from the interest rate hedge and the hedged cash flows from the syndicated bank loan are expected to be realized in 2018 and 2019 and will be recognized proportionately for the relevant periods through profit or loss as an interest expense. A further addition of –17 million euros relates to the hedging of US dollar payments for the acquisition of the Darex Packag- ing Technologies business. Hedges of a net investment in a foreign entity: The accounting treatment of hedges of a net investment in a foreign entity against translation risk is similar to that applied to cash flow hedges. The gain or loss arising from the effective portion of the hedging instrument is recognized in equity through other comprehensive income; the gain or loss of the ineffective portion is recognized directly through profit or loss. The gains or losses recognized directly in equity remain there until disposal or partial disposal of the net investment. The initial balance recognized in equity relates essentially to translation risks arising from net investments in Swiss francs and US dollars for which the associated hedges were entered into and settled in previous years. 156 Notes to the consolidated financial statements Henkel Annual Report 2017 An addition of 4 million euros relates to the hedge of our net investments in Chinese yuans and Russian rubles. Hedges of a net investment in a foreign entity (after income taxes) 138 End balance Initial balance Addition (recognized in equity) Disposal (recognized through profit or loss) 31 31 4 – – – 35 31 in million euros 2017 2016 Risks arising from financial instruments; risk management As a globally active corporation, Henkel is exposed in the course of its ordinary business operations to credit risks, liquidity risks and market risks (currency translation, interest rate and commodity price risks). The purpose of financial risk management is to restrict the exposure arising from operating activities through the use of selective derivative and non-de- rivative hedges. Henkel uses derivative financial instruments exclusively for the purposes of risk management. Without these instruments, Henkel would be exposed to higher finan- cial risks. Changes in exchange rates, interest rates or com- modity prices can lead to significant fluctuations in the fair values of the derivatives used. These variations in fair value should not be regarded in isolation from the hedged items, as derivatives and the underlying constitute a unit in terms of countervailing fluctuations. Management of currency, interest rate and liquidity risks is based on the treasury guidelines introduced by the Manage- ment Board, which are binding on the entire corporation. They define the targets, principles and competences of the Corpo- rate Treasury unit. These guidelines describe the fields of responsibility and establish the distribution of these responsi- bilities between Corporate Treasury and Henkel’s subsidiaries. The Management Board is regularly and comprehensively informed of all major risks and of all relevant hedging trans- actions and arrangements. A description of the objectives and fundamental principles adopted in capital management can be found in the combined management report on pages 80 and 81. There were no major risk clusters in the reporting period. Credit risk In the course of its business activities with third parties, the Henkel Group is exposed to global credit risk arising from both its operating business and its financial investments. This risk derives from the possibility of a contractual party not fulfilling its obligations. The maximum credit risk is represented by the carrying value of the financial assets recognized in the statement of financial position (excluding financial investments recognized using the equity method), as indicated in the following table: Maximum risk position in million euros Trade accounts receivable Derivative financial instruments not included in a designated hedging relationship Derivative financial instruments included in a designated hedging relationship Other financial assets Cash and cash equivalents Total carrying values 139 2017 3,544 54 10 1,057 916 5,581 2016 3,349 72 31 719 1,389 5,560 In its operating business, Henkel is confronted by progressive concentration and consolidation on the customer side, as reflected in the receivables from individual customers. A credit risk management system operating on the basis of a globally applied credit policy ensures that credit risks are constantly monitored and bad debts minimized. This policy, which applies to both new and existing customers, governs the allocation of credit limits and compliance with those limits, individual analyses of customers’ creditworthiness based on both internal and external financial information, risk classifi- cation, and continuous monitoring of the risk of bad debts at the local level. We also monitor our key customer relation- ships at the regional and global level. In addition, safeguarding measures are implemented on a selective basis for particular countries and customers inside and outside the eurozone. Collateral received and other safeguards include country- specific and customer-specific protection afforded by credit insurance, confirmed and unconfirmed letters of credit in the export business, and guarantees, warranties, and cover notes. We make valuation allowances with respect to financial assets so that the assets are recognized at their fair value at the reporting date. In the case of impairment losses on trade accounts receivable that have already occurred but have not yet been identified, we apply global valuation allowances on the basis of empirical evidence, taking into account the overdue Henkel Annual Report 2017 Notes to the consolidated financial statements 157 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events structure of the assets concerned. As a rule, the impairment test on loans and receivables that are more than 180 days over- due results in a valuation allowance of 100 percent. In all, we reversed valuation allowances on loans and receiv- ables in 2017 in the amount of 1 million euros (previous year: –25 million euros). The decision as to whether a credit risk is managed through a valuation allowance account or by derecognition of the impaired receivable depends upon the probability of incurring a loss. For accounts receivable classified as irrecoverable, we report the credit risk directly through derecognition of the impaired item or entry of the relevant amount in the valuation allowance account. If the basis for the original impairment is eliminated, we recognize a reversal through profit or loss. Age analysis of non-impaired overdue loans and receivables The carrying amount of loans and receivables with terms renegotiated because they would have otherwise fallen overdue or been impaired was 0 million euros (previous year: 0 million euros). Based on our experience, we do not expect the necessity for any further valuation allowances, other than those described above, on non-overdue, non-impaired financial assets. Analysis in million euros At December 31, 2017 At December 31, 2016 Less than 30 days 30 to 60 days 61 to 90 days More than 91 days 268 235 84 73 43 35 13 7 140 Total 408 350 Credit risks also arise from financial investments such as cash at banks, securities and the positive fair value of derivatives. Such exposure is limited by our Corporate Treasury specialists through the selection of counterparties with strong credit ratings, and limitations on the amounts allocated to individual invest- ments. In financial investments and derivatives trading with German and international banks, we only enter into transactions with counterparties of high financial standing. We invest exclusively in securities from issuers with an investment grade rating. Our cash deposits can be liquidated at short notice. Our financial investments are broadly diversified across various counterparties and various financial assets. To minimize the credit risk, we agree netting arrangements to offset bilateral receivables and obligations with counterparties. We additionally enter into collateral agreements with relevant banks, on the basis of which reciprocal sureties are estab- lished twice a month to secure the fair values of contracted derivatives and other claims and obligations. The netting arrangements only provide for a contingent right to offset transactions conducted with a contractual party. Accordingly, associated amounts can be offset only under certain circum- stances, such as the insolvency of one of the contractual par- ties. Thus, the netting arrangements do not meet the offsetting criteria under IAS 32 Financial Instruments: Presentation. The following table provides an overview of financial assets and financial liabilities from derivatives that are subject to netting, collateral, or similar arrangements: Financial assets and financial liabilities from derivatives subject to netting, collateral, or similar arrangements 141 At December 31 in million euros Financial assets Financial liabilities Gross amount recog- niz ed in the statement of financial position 1 2016 103 77 2017 64 100 Amount eligible for offsetting Financial collateral received / provided Net amount 2016 2017 2016 2017 2016 2017 76 76 55 55 21 7 5 37 6 – 6 4 8 1 Fair values excluding valuation allowance of 0 million euros made for counterparty credit risk (previous year: 2 million euros). 158 Notes to the consolidated financial statements Henkel Annual Report 2017 In addition to netting and collateral arrangements, investment limits are set, based on the ratings of the counterparties, in order to minimize credit risk. These limits are monitored and adjusted regularly. When determining the limits, we also apply certain other indicators, such as the pricing of credit default swaps (CDS) by banks. A valuation allowance of 0 million euros exists to cover the remaining credit risk from the posi- tive fair values of derivatives (previous year: 2 million euros). Liquidity risk Liquidity risk is defined as the risk of an entity failing to meet its financial obligations at any given time. any time, the liquidity within the Group is largely centralized and managed through the use of cash pools. We predomi- nantly invest cash in financial assets traded in a liquid market in order to ensure that they can be sold at any time to procure liquid funds. In addition, the Henkel Group has at its disposal confirmed credit lines of 1.5 billion euros. These credit lines have terms until 2019. The individual subsidiaries additionally have at their disposal committed bilateral loans of 0.1 billion euros with a revolving term of up to one year. Our credit rating is regularly assessed by the rating agencies Standard & Poor’s and Moody’s. Our liquidity risk can therefore be regarded as very low. We minimize this risk by deploying financing instruments in the form of issued bonds and commercial paper. With the help of our existing debt issuance program in the amount of 6 bil- lion euros, this is also possible on a short-term and flexible basis. In order to ensure the financial flexibility of Henkel at The maturity structure of the original and derivative financial liabilities within the scope of International Financial Report- ing Standard (IFRS) 7 based on cash flows is shown in the following table. Cash flows from financial liabilities 142 Remaining term Up to 1 year Between 1 and 5 years More than 5 years Dec. 31, 2016 Total cash flow in million euros Bonds Commercial paper 1 Liabilities to banks Trade accounts payable Sundry financial instruments 2 Original financial instruments Derivative financial instruments Total Dec. 31, 2016 Carrying amounts 2,258 381 1,082 3,665 205 7,591 77 7,668 14 385 53 3,665 100 4,217 64 4,281 1,946 – 1,071 – 96 3,113 – 3,113 353 – – – 11 364 13 377 1 From the euro and US dollar commercial paper program (total volume: 2 billion US dollars and 1 billion euros). 2 Sundry financial instruments include amounts due to customers, and finance bills. 2,312 385 1,124 3,665 207 7,693 77 7,770 143 Cash flows from financial liabilities in million euros Bonds Commercial paper 1 Liabilities to banks Trade accounts payable Sundry financial instruments 2 Original financial instruments Derivative financial instruments Total Dec. 31, 2017 Carrying amounts 2,666 729 946 3,717 202 8,260 100 8,360 Remaining term Up to 1 year Between 1 and 5 years More than 5 years Dec. 31, 2017 Total cash flow 522 742 55 3,717 143 5,179 69 5,248 2,205 – 933 – 52 3,190 16 3,206 – – – – 9 9 – 9 2,727 742 988 3,717 204 8,378 85 8,463 1 From the euro and US dollar commercial paper program (total volume: 2 billion US dollars and 1 billion euros). 2 Sundry financial instruments include amounts due to customers, and finance bills. Henkel Annual Report 2017 Notes to the consolidated financial statements 159 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Currency risk The global nature of our business activities results in a huge number of cash flows in different currencies. The resultant currency exposure breaks down into two categories, namely transaction and translation risks. Transaction risks arise from possible exchange rate fluctuations causing changes in the value of future foreign currency cash flows. The hedging of the resultant exchange rate risks forms a major part of our central risk management activity. Transaction risks arising from our operating business are partially avoided by the fact that we largely manufacture our products in those countries in which they are sold. Residual transaction risks on the operating side are proactively managed by Corporate Treasury. This includes the ongoing assessment of the specific currency risk and the development of appropriate hedging strategies. The objective of our currency hedging is to fix prices based on hedging rates so that we are protected from future adverse fluctuations in exchange rates. Because we limit our potential losses, any negative impact on profits is restricted. The transaction risk arising from major financial payables and receivables is, for the most part, hedged. In order to manage these risks, we primarily utilize forward exchange contracts and currency swaps. The derivatives are designated as cash flow hedges or “Held for trading” and measured accordingly. The currency risk that exists within the Group in the form of transaction risk initially affects equity in the case of cash flow hedges, while all changes in the value of derivatives designated as “Held for trading“ are recognized directly through profit or loss. The value-at-risk pertaining to the transaction risk of the Henkel Group as of December 31, 2017 amounted to 95 million euros after hedging (previous year: 99 million euros). The value-at-risk shows the maximum expected risk of loss in a year as a result of currency fluctuations. Our value-at-risk analysis is based on one year in our internal risk reports as it provides a more comprehensive representation of the risk associated with a fiscal year. The risk arises from imports and exports by Henkel AG & Co. KGaA and its foreign subsidiaries. Due to the international nature of its activities, the Henkel Group has a portfolio with more than 50 different currencies. The following table shows the value-at-risk for Henkel’s major currencies. Market risk Market risk exists where the fair value or future cash flows of a financial instrument may fluctuate due to changes in market prices. Market risks primarily take the form of currency risk, interest rate risk and various price risks (particularly the commodity price risk, and the share price risk arising from our Long-Term Incentive [LTI]). Henkel uses equity forward contracts to hedge against the share price risk. The Corporate Treasury department manages currency exposure and interest rates centrally for the Group and is therefore responsible for all transactions with financial derivatives and other financial instruments. Trading, Treasury Controlling and Settlement (front, middle and back offices) 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 Corporate Treasury guidelines, for creditworthiness and the quality of their quotations. Financial derivatives are used to manage currency exposure and interest rate risks in connection with operating activities and the resultant financing requirements, again in accordance with the Corporate Treasury guidelines. Financial derivatives are entered into solely 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 conclusion of financial transactions to their entry in the accounts is covered. Much of the currency trading takes place on internet-based, multibank dealing plat- forms. These foreign currency transactions are automatically transferred into the treasury system. The currency exposure and interest rate risks reported by all subsidiaries under stan- dardized reporting procedures are likewise 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. Market risk is monitored on the basis of sensitivity analyses and value-at-risk computations. Sensitivity analyses enable estimation of potential losses, future gains, fair values or cash flows of instruments susceptible to market risks arising from one or several selected hypothetical changes in foreign exchange rates, interest rates, commodity prices or other relevant market rates or prices over a specific period. We use sensitivity analyses in the Henkel Group because they enable reasonable risk assessments to be made on the basis of direct assumptions (e.g. an increase in interest rates). Value-at-risk analyses reveal the maximum potential future loss of a certain portfolio over a given period based on a specified probability level. 160 Notes to the consolidated financial statements Henkel Annual Report 2017 Henkel’s interest management strategy is essentially aligned to optimizing the net interest result for the Group. The decisions made in interest management relate to the bonds, liabilities to banks, and commercial paper issued to secure Group liquidity, the securities and time deposits used for cash investments, and the other financial instruments. The financial instruments exposed to interest rate risk are primarily denominated in euros and US dollars. Depending on forecasts with respect to interest rate develop- ments, Henkel enters into derivative financial instruments, primarily interest rate swaps, in order to optimize the interest rate lock-down structure. In the event of an expected rise in interest rate levels, Henkel protects its positions by transacting additional interest rate derivatives as an effective means of hedging against interest rates rising over the short term. In addition to the two fixed-rate euro-denominated bonds, Henkel entered into a cross-currency swap to convert the bond denominated in British pounds into a fixed-rate euro obligation. Two fixed-rate bonds denominated in US dollars were also issued. To hedge against rising US dollar interest rates, the floating-rate interest payable in US dollars for the syndicated bank loan was converted into fixed-rate interest payments in fiscal 2017. All other financial instruments bear floating interest rates. Our exposure (after hedging) to interest rate risk at the reporting dates was as follows: Interest rate exposure in million euros Fixed-interest financial instruments Euro US dollar Others Floating-interest financial instruments Euro US dollar Chinese yuan Russian ruble Others 145 Carrying amounts 2016 2017 – 1,546 – 712 – – 2,258 357 – 1,797 511 26 860 – 43 – 1,535 – 2,048 – – 3,583 94 – 749 316 24 673 358 Currency exposure 1 in million euros Russian ruble Chinese yuan British pound Canadian dollar US dollar Others 1 Transaction risk. 144 2017 19 9 9 6 – 3 55 95 2016 19 9 4 8 – 14 73 99 The value-at-risk analysis assumes a time horizon of one year and a unilateral confidence interval of 95 percent. We adopt the variance-covariance approach as our basis for calculation. Volatilities and correlations are determined using historical data. The value-at-risk analysis is based on the operating book positions and budgeted positions in foreign currency, normally with a forecasting horizon of nine months. Translation risks emanate from changes caused by foreign exchange fluctuations to items on the statement of financial position and the income statement of a subsidiary, and the effect these changes have on the translation of individual company financial statements into Group currency. However, unlike transaction risk, translation risk does not necessarily impact future cash flows. The Group’s equity reflects the changes in carrying values resulting from foreign exchange influences. The risks arising from the translation of the earnings results of subsidiaries in foreign currencies and from net investments in foreign entities are only hedged in exceptional cases. Interest rate risk Interest rate risk encompasses those potentially negative influences on profits, equity or cash flow in current or future reporting periods arising from changes in interest rates. In the case of fixed-interest financial instruments, changing capital market interest rates result in a fair value risk, as the attributable fair values fluctuate depending on those capital market interest rates. In the case of floating-interest financial instruments, a cash flow risk exists because the interest payments may be subject to future fluctuations. The funding and investment activities of the Henkel Group mainly take place on international money and capital markets. Our financial liabilities and cash deposits are exposed to the risk of changing interest rates. The aim of our centralized interest rate management is to reduce this risk by choosing fixed or floating interest rate contracts and by using interest rate derivatives. Only those derivative financial instruments that can be modeled, monitored and assessed in the risk man- agement system may be used to hedge the interest rate risk. Henkel Annual Report 2017 Notes to the consolidated financial statements 161 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events The calculation of the interest rate risk is based on sensitivity analyses. The analysis of cash flow risk examines all the main floating-interest financial instruments as of the reporting date. Net financial position is defined as cash and cash equivalents plus readily monetizable financial instruments classified as “Available for sale” or according to the “Fair value option,” less borrowings, and plus positive and less negative fair values of hedging transactions. The interest rate risk figures shown in the table are based on this calculation at the relevant reporting date. When analyzing fair value risk, we assume a parallel shift in the interest curve of 100 basis points and calculate the hypothetical loss or gain of the relevant interest rate derivatives at the reporting date. The risk of interest rate fluctuations with respect to the earnings of the Henkel Group is shown in the basis point value (BPV) analysis in the following table. Interest rate risk in million euros Based on an interest rate change of 100 basis points of which: Cash flow through profit and loss Fair value recognized in equity through comprehensive income 146 2016 2017 – – – 14 4 10 Other price risks (commodity price risk) Uncertainty with respect to commodity price development impacts the Group. Purchase prices for raw materials can affect the net assets, financial position and results of operations of Henkel. The risk management strategy put in place by the Group management for safeguarding against procurement market risk is described in more detail in the risks and oppor- tunities report on pages 98 and 99. As a small part of the risk management strategy, cash-settled commodity futures may be entered into on the basis of fore- casted purchasing requirements in order to hedge future uncertainties with respect to commodity prices. Cash-settled commodity derivatives are only used at Henkel where there is a direct relationship between the hedging derivative and the physical underlying. Henkel does not practice hedge accounting and can therefore be exposed to temporary price risks when holding commodity derivatives. Such price risks arise due to the fact that the commodity derivatives are measured at fair value whereas the purchasing requirement, as a pending transaction, is not measured or recognized. This can lead to losses being recognized in profit or loss and equity. Develop- ments in fair values and the resultant risks are continuously monitored. 162 Notes to the consolidated financial statements Henkel Annual Report 2017 Notes to the consolidated statement of income 22 Sales and principles of income recognition 24 Marketing, selling and distribution expenses Sales increased year on year to 20,029 million euros (previous year: 18,714 million euros). Revenues and their development by business unit and region are summarized in the Group seg- ment report and in the key financials by region on pages 113 and 114. A detailed explanation of the development of major income and expense items can be found in the combined management report on pages 67 to 71. Sales comprise sales of goods and services less direct sales deductions such as customer-related rebates, credits and other benefits paid or granted. Sales are recognized once the goods have been delivered or the service has been performed. In the case of goods, this coincides with the physical delivery and so-called transfer of risks and rewards. Henkel uses different terms of delivery that contractually determine the transfer of risks and rewards. It must also be probable that the economic benefits associated with the transaction will flow to the Group, and the costs incurred with respect to the transaction must be reliably measurable. Services are generally provided in conjunction with the sale of goods, and recorded once the service has been performed. No sale is recognized if there are significant risks relating to the receipt of the consideration or it is likely that the goods will be returned. Interest income is recognized on a time-proportion basis that takes into account the effective yield on the asset and the interest rate in force. Dividend income from investments is recognized when the shareholders’ right to receive payment is legally established. 23 Cost of sales Marketing, selling and distribution expenses amounted to 4,876 million euros (previous year: 4,635 million euros). In addition to marketing organization and distribution expenses, this item comprises, in particular, advertising, sales promotion and market research expenses. Also included here are the expenses of technical advisory services for customers, valuation allowances on trade accounts receivable and valua- tion allowances and impairment losses on trademarks and other rights. 25 Research and development expenses Research and development expenses increased year on year to 476 million euros (previous year: 463 million euros). Expenditures directly attributable to research and develop- ment activities amounted to 469 million euros (previous year: 460 million euros). The capitalization of research expenses is not permitted. Development expenditures are recognized as an asset if all the criteria for recognition are met, the research phase can be clearly distinguished from the development phase, and the expenditures can be attributed to distinct project phases. Currently, the criteria set out in International Accounting Standard (IAS) 38 Intangible Assets for recognizing development expenditures are not all met with respect to product and tech- nology developments, due to a high level of interdependence within these developments and the difficulty of assessing which products will eventually be marketable. The cost of sales increased from 9,742 million euros to 10,680 million euros. 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 production overheads including the production-related amortization / depreciation and impair- ment of intangible assets and property, plant and equipment. 26 Administrative expenses Administrative expenses amounted to 980 million euros (previous year: 1,062 million euros). Administrative expenses include personnel and material costs relating to the Group management, Human Resources, Pur- chasing, Accounting and IT functions, as well as the costs of managing and administering the business units. Henkel Annual Report 2017 Notes to the consolidated financial statements 163 27 Other operating income 29 Financial result Other operating income 147 Financial result in million euros 2016 2017 in million euros Gains on disposal of non-current assets Release of provisions 1 Insurance claim payouts Write-ups on non-current assets Payments on derecognized receivables Impairment reversal on assets held for sale Sundry operating income Total 13 37 2 – 1 – 56 109 18 10 10 – – – 91 129 Interest result Other financial result Investment result Total Interest result in million euros Interest and similar income from third parties Interest to third parties Total Other financial result in million euros Interest result from net obligation (pensions) Interest income from reimbursement rights (IAS 19) Other financial expenses Other financial income Total 1 Including income from the release of provisions for pension obligations (curtailment gains) of 6 million euros in 2017 (2016: 13 million euros). Sundry operating income relates to a number of individual items arising from ordinary operating activities, such as grants and subsidies, tax refunds for indirect taxes, and similar income. The figure also includes income of 19 million euros (previous year: 0 million euros) from the sale of our profes- sional Western European building material business. 28 Other operating expenses Other operating expenses in million euros Losses on disposal of non-current assets Other taxes Amortization, depreciation of other assets Sundry operating expenses Total 148 2017 – 5 – – – 86 – 91 2016 – 7 – 1 – 1 – 137 – 146 149 2017 – 37 – 10 – 4 – 51 150 2017 18 – 55 – 37 151 2017 – 15 4 – 402 403 – 10 2016 – 5 – 26 – 2 – 33 2016 20 – 25 – 5 2016 – 15 5 – 118 102 – 26 Other financial expenses include –380 million euros (previous year: –106 million euros) from currency losses. Other financial income includes 395 million euros (previous year: 98 million euros) from currency gains. Please see page 153 of the financial instruments report for information on the net results of the valuation categories under International Financial Reporting Standard (IFRS) 7, and the reconciliation to financial result. Sundry operating expenses include a number of individual items arising from ordinary operating activities, such as fees, provisions for litigation and third party claims, sundry taxes, and similar expenses. Investment result The investment result includes 4 million euros for expenses from the valuation of companies that are recognized by the equity method (2016: 2 million euros). 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 164 Notes to the consolidated financial statements Henkel Annual Report 2017 30 Taxes on income Income tax expense / income breaks down as follows: Income before tax and analysis of taxes in million euros Income before tax Current taxes Deferred taxes Taxes on income Tax rate in percent 152 2017 3,004 654 – 191 463 2016 2,742 830 – 181 649 23.7 % 15.4 % We have summarized the individual company reports – pre- pared on the basis of the tax rates applicable in each country and taking into account consolidation procedures – in the statement below, showing how the expected tax charge, based on the tax rate applicable to Henkel AG & Co. KGaA of 31 per- cent, is reconciled to the effective tax charge disclosed. Tax reconciliation statement in million euros Income before tax Tax rate (including trade tax) of Henkel AG & Co. KGaA Expected tax charge Main components of tax expense and income in million euros Current tax expense / income in the reporting year Current tax adjustments for prior years Deferred tax expense / income from temporary differences Deferred tax expense / income from unused tax losses Deferred tax expense from tax credits Deferred tax income from changes in tax rates Increase / decrease in valuation allowances on deferred tax assets 2016 816 14 – 164 – 8 – 4 – 8 3 153 2017 664 –10 50 46 1 Tax reductions due to differing tax rates abroad Tax increases / reductions for prior years Tax increases / reductions due to changes in tax rates Tax increases / reductions due to the recognition of deferred tax assets relating to unused tax losses and temporary differences Tax reductions due to tax-free income and other items Tax increases / reductions arising from additions and deductions for local taxes – 289 Tax increases due to withholding taxes Tax increases due to non-deductible expenses 1 Tax charge disclosed 155 2016 2017 2,742 3,004 31 % 31 % 850 – 122 6 – 8 3 931 – 100 7 – 289 1 – 208 – 192 – 1 43 86 649 – 6 53 58 463 Deferred tax expense by items on the statement of financial position in million euros Intangible assets Property, plant and equipment Financial assets Inventories Other receivables and other assets Special tax items Provisions Liabilities Tax credits Unused tax losses Financial statement figures Tax rate 23.7 % 15.4 % 154 2017 – 281 – 16 – 56 9 1 – 3 52 55 1 47 Deferred taxes are calculated on the basis of tax rates that apply in the individual countries at the year-end date or which have already been legally decided. In Germany, there is a uni- form corporate income tax rate of 15 percent plus a solidarity surcharge of 5.5 percent. After taking into account trade tax, this yields an overall tax rate of 31 percent. Tax expenses and income for the reporting year reflect the impacts of the tax reform in the USA that came into effect on December 22, 2017. The reduced rate of corporate tax was applied to deferred tax items, resulting in deferred tax income of 294 million euros. 2016 16 – 38 – 1 8 14 – 2 – 66 – 104 – 4 – 4 – 181 – 191 Deferred tax assets and liabilities are netted where they involve the same tax authority and the same tax creditor. Henkel Annual Report 2017 Notes to the consolidated financial statements 165 The deferred tax assets and liabilities stated on the reporting date relate to the following items of the consolidated statement of financial position, unused tax losses and tax credits: remeasurement of the deferred tax liabilities on intangible and financial assets at reporting year-end, resulting in a lower figure. Allocation of deferred taxes 156 in million euros Intangible assets Property, plant and equipment Financial assets Inventories Other receivables and other assets Special tax items Provisions Liabilities Tax credits Unused tax losses Amounts netted Financial statement figures Deferred tax assets Deferred tax liabilities December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 360 381 1,037 724 76 101 2 42 30 8 39 – – 18 1 50 38 – 822 182 7 102 – 550 29 – 37 26 – 677 147 6 51 73 168 3 48 33 9 12 – – – 405 – 550 – 405 1,030 949 833 617 The deferred tax assets of 677 million euros (previous year: 822 million euros) relating to provisions in the financial state- ment result primarily from recognition and measurement dif- ferences with respect to pension obligations. The deferred tax liabilities of 724 million euros (previous year: 1,037 million euros) relating to intangible assets are mainly attributable to business combinations. The tax reform in the USA necessitated An excess of deferred tax assets is only recognized insofar as it is likely that the company concerned will achieve sufficiently positive taxable profits in the future against which the deduct- ible temporary differences can be offset and tax loss carry- forwards can be used. Deferred taxes have not been recognized with respect to unused tax losses of 249 million euros (previous year: 269 million euros), as it is not probable that sufficient taxable profit will be available against which they may be utilized. Of these tax losses carried forward, 171 million euros (previous year: 190 million euros) expire after more than three years. Thereof 48 million euros (previous year: 58 million euros) are attributable to state taxes of our US subsidiaries (tax rate around 2.5 percent). Of the tax losses carried forward, 52 million euros are non-expiring (previous year: 73 million euros). Deferred tax liabilities of 52 million euros (previous year: 62 million euros) relating to the retained earnings of foreign subsidiaries have been recognized due to the fact that these earnings will be distributed in 2018. We have summarized the expiry dates of unused tax losses and tax credits in the following table, which includes unused tax losses arising from losses on the disposal of assets of 9 million euros (previous year: 10 million euros) which may be carried forward without restriction. In addition to the unused tax losses listed in the table, an interest expense of 12 million euros (previous year: 5 million euros) is available which may be carried forward in full with no expiration. Expiry dates of unused tax losses and tax credits 157 in million euros Expire within 1 year 2 years 3 years more than 3 years May be carried forward without restriction Total Unused tax losses Tax credits December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 12 2 7 674 107 802 24 1 128 403 95 651 1 – – 6 – 7 1 – – 5 – 6 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 166 Notes to the consolidated financial statements Henkel Annual Report 2017 31 Non-controlling interests The amount shown here represents the proportion of net income and losses attributable to other shareholders of con- solidated affiliated companies. Their share of net income was 22 million euros (previous year: 41 million euros) and that of losses was 0 million euros (previ- ous year: 1 million euros). The non-controlling interests included in the Henkel Group at the end of fiscal 2017 had no material impact on our net assets, financial position and results of operations. The Group has no joint operations or unconsolidated structured entities. In many countries, different tax rates apply to losses on the disposal of assets than to operating profits, and in some cases losses on the disposal of assets may only be offset against gains on the disposal of assets. Tax loss carryforwards in the amount of 257 million euros are attributable to our US subsidiaries. Of this amount, 2 million euros relate to federal and state tax loss carryforwards, and 251 million euros (previous year: 231 million euros) relate exclusively to state taxes. Equity-decreasing deferred taxes of 71 million euros were recognized (previous year: equity-increasing deferred taxes of 55 million euros). Within this figure, an expense of 66 mil- lion euros (previous year: income of 55 million euros) results from actuarial gains and losses on pension obligations. The change in tax rate following the tax reform in the USA reduced equity by 56 million euros. In addition, an expense of 2 mil- lion euros (previous year: income of 0 million euros) is attrib- utable to hedges of net investments in foreign entities, while currency effects resulted in an expense of 3 million euros (previous year: 1 million euros). Henkel Annual Report 2017 Notes to the consolidated financial statements 167 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Other disclosures 32 Reconciliation of adjusted net income in million euros EBIT (as reported) One-time gains One-time charges Restructuring expenses Adjusted EBIT Adjusted return on sales Financial result Taxes on income (adjusted) Adjusted tax rate Adjusted net income Attributable to non-controlling interests Attributable to shareholders of Henkel AG & Co. KGaA Adjusted earnings per ordinary share Adjusted earnings per preferred share Of the one-time gains recognized in 2017, 19 million euros is attributable to the sale of Henkel’s professional Western Euro- pean building material business (2016: 0 million euros), 1 mil- lion euros to performance-related purchase price components (2016: 1 million euros) and 1 million euros to a release of pro- visions for legal disputes (2016: 0 million euros). The adjusted charges for fiscal 2017 include expenses of 131 million euros relating to the integration of The Sun Products Corporation (2016: 42 million euros), 23 million euros to the optimization of our IT system architecture for managing business processes (2016: 26 million euros), 11 million euros to acquisition-related costs (2016: 20 million euros), and 17 million euros relating to the discontinuation of product lines in our General Industry business (2016: 0 million euros). Of the restructuring expenses in fiscal 2017, 77 million euros fall under cost of sales (2016: 47 million euros) and 122 million euros fall under marketing, selling and distribution expenses (2016: 77 million euros). A further 7 million euros is assigned to research and development expenses (2016: 3 million euros), and 39 million euros to administrative expenses (2016: 150 mil- lion euros). Taxes on income amounting to 853 million euros reflect the tax effects of the adjustments to EBIT. Moreover, the figure for fiscal 2017 has been adjusted for the one-time impacts of the tax reform in the USA. This adjustment resulted in an earnings effect totaling 270 million euros. 2016 2017 2,775 – 1 121 277 3,172 16.9 – 33 – 775 24.7 2,364 41 2,323 3,055 – 21 182 245 3,461 17.3 – 51 – 853 25.0 2,557 23 2,534 in % in % in euros in euros 5.34 5.36 5.83 5.85 33 Payroll cost and employee structure Payroll cost 1 in million euros Wages and salaries Social security contributions and staff welfare costs Pension costs Total 2016 2,427 410 164 3,001 158 + / – 10.1 % – – – 9.1 % 0.4 pp 54.5 % 10.1 % 0.3 pp 8.2 % – 43.9 % 9.1 % 9.2 % 9.1 % 159 2017 2,552 447 168 3,167 1 Excluding personnel-related restructuring expenses of 87 million euros (previ- ous year: 137 million euros). Number of employees per function 1 Production and engineering Marketing, selling and distribution Research and development Administration Total 160 2017 28,150 13,650 2,700 7,450 51,950 2016 26,550 13,600 2,700 7,100 49,950 1 Basis: annual average headcount of full-time employees, excluding appren- tices and trainees, work experience students and interns; figures rounded. 168 Notes to the consolidated financial statements Henkel Annual Report 2017 34 Share-based payment plans Global Long Term Incentive Plan (LTI Plan) 2020+ The Global Long Term Incentive (LTI) Plan 2020+ was intro- duced effective January 1, 2017 to replace the previous Global LTI Plan 2013. Both programs will exist alongside each other until the final tranche of the Global LTI Plan 2013 is paid out in 2020. However, as from January 1, 2017, first-time-eligible employees are only being admitted to the Global LTI Plan 2020+. Unlike the Global LTI Plan 2013, which is designed as a share- based remuneration scheme with cash settlement, the Global LTI Plan 2020+ provides for share-based remuneration settled with preferred shares of Henkel AG & Co. KGaA. These treasury shares are granted on condition that members of the Plan are employed for four years by Henkel AG & Co. KGaA or one of its subsidiaries in a position senior enough to qualify to participate, and that they are not under notice during that period. This minimum period of employment pertains to the calendar year in which the treasury shares are granted and the three subsequent calendar years. A performance-related investment amount is pledged to eligible employees at the start of each four-year cycle. Target achievement is determined, and the investment amount specified, at the end of the first calendar year. At the start of the second calendar year, this investment amount – after deduction of taxes and social security contributions, where appropriate – is used to purchase treasury shares on the stock exchange, which are then transferred to the employees. The number of shares transferred to each employee on the basis of the investment amount is determined by the actual price (stock exchange price) of the shares at the time of purchase. The shares are subject to a lock-up period that ends upon completion of the relevant four-year cycle. During this time, the employees partic- ipate in all share price developments. Once the lock-up period has expired, the employees may dispose of the shares as they wish. In addition, an Outperformance Reward, which grants treasury shares based on the achievement of target figures established in advance, was set at the beginning of the four-year medium-term plan. In this case, the employees are not granted the treasury shares until the four-year performance measurement period has ended, but may then dispose of them immediately at will. The investment amount specified in the first year of the cycle is recognized as a proportionate payroll cost spread over the four- year performance period. As the Global LTI Plan 2020+ provides for settlement using treasury shares, the allocations are recog- nized in equity. If treasury shares are granted at the end of the performance measurement period, equity is reduced accordingly with no effect on profit or loss. In fiscal 2017, an equity-increasing payroll cost of 21 million euros was recognized in connection with the Global LTI Plan 2020+. Global Long Term Incentive (LTI) Plan 2013 In fiscal 2013, the general terms and conditions of the previously implemented Global CPU Plan 2004 were amended and replaced by the Global LTI Plan 2013, which is a share-based remuneration scheme with cash settlement. Effective January 1, 2017, this scheme was replaced by the Global LTI Plan 2020+. Since 2013, Cash Performance Units (CPUs) have been granted on condition that members of the Plan are employed for four years by Henkel AG & Co. KGaA or one of its subsidiaries in a position senior enough to qualify to participate and that they are not under notice during that period. This minimum period of employment pertains to the calendar year in which the CPUs are granted and the three subsequent calendar years. In addition, an Outperfor- mance Reward, which awarded CPUs based on the achievement of target figures established in advance, was set at the beginning of the four-year medium-term plan. Until payment of the final tranche in 2020, the total value of the cash remuneration payable to senior management personnel is recalculated on each reporting date and on the settlement date, based on the fair value of the CPUs, and recognized through an appropriate increase in provisions as a payroll cost that is spread over the period of service of the beneficiary. All changes to the measurement of this provision are reported under payroll cost. Due to the extension of the cycle, one tranche with a three-year term and another with a four-year term were issued in 2013. The number of CPUs granted depends not only on the seniority of the officer but also on the achievement of set target figures. For the cycles issued from 2013 onward, the target is based on growth in adjusted earnings per preferred share. The value of a CPU in each case is the average price of the Henkel preferred share as quoted 20 stock exchange trading days after the Annual General Meeting following the performance period. As of the reporting date, the calculation of the provision was based on a fair value of 110.35 euros (closing price of Henkel preferred shares on Decem- ber 29, 2017; on December 30, 2016: 113.25 euros) per CPU. The overall payout of the long-term incentive is subject to a cap. The eleventh four-year cycle, which was issued in 2013, became due for payment in 2017, together with the Outperformance Reward. At December 31, 2017, the CPU Plan worldwide comprised 471,923 CPUs (December 31, 2016: 516,200 CPUs) from the four- year tranche issued in 2014, 520,448 CPUs (December 31, 2016: 576,746 CPUs) from the tranche issued in 2015, and 502,700 CPUs (December 31, 2016: 560,687 CPUs) from the tranche issued in 2016. This resulted in an additional expense in the reporting year of 43.0 million euros (December 31, 2016: 61.8 million euros). The corresponding provision amounted to 122.9 million euros (December 31, 2016: 189.5 million euros), of which 53.1 million euros (December 31, 2016: 97.6 million euros) is vested. Henkel Annual Report 2017 Notes to the consolidated financial statements 169 35 Group segment report The format for reporting the activities of the Henkel Group by segment is by business unit and reportable segments; selected regional information is also provided. The segment report corresponds to the way in which the Group manages its oper- ating business, and the Group’s reporting structure. The assignment of operating segments to individual reportable segments is based on the economic characteristics of the busi- ness, the nature of products and production processes, the type of customer groups, and the characteristics of the sales and distribution structure and of the regulatory environment. Reportable segments Adhesives for Consumers, Craftsmen and Building In the Adhesives for Consumers, Craftsmen and Building segment, we market a comprehensive range of brand-name products for private users, craftsmen and the construction industry. Based on our four international brand platforms, namely Loctite, Pritt, Pattex and Ceresit, we offer target-group- aligned system solutions for applications in the household, in schools and in offices, for do-it-yourselfers and craftsmen, and also for the building industry. Industrial Adhesives The Industrial Adhesives segment covers four business areas: Packaging and Consumer Goods Adhesives, Transport and Metal, General Industry, and Electronics. The Packaging and Consumer Goods Adhesives business serves major international customers as well as medium- and small- sized manufacturers of the consumer goods and furniture industries. Our economies of scale allow us to offer attractive solutions for standard and volume applications. The Transport and Metal business serves major international customers in the automotive and metal-processing industries, offering tailor-made system solutions and specialized technical services that cover the entire value chain – from steel strip coating to final vehicle assembly. In the General Industry business, our customers comprise manufacturers from a multitude of industries, ranging from household appliance producers to the wind power industry. Our portfolio here encompasses Loctite products for industrial maintenance, repair and overhaul, a wide range of sealants and system solutions for surface treatment applications, and specialty adhesives. Our Electronics business offers customers from the worldwide electronics industry a broad spectrum of innovative, high-tech adhesives and soldering materials for the manufacture of microchips and electronic assemblies. Beauty Care The Beauty Care segment covers our globally active Branded Consumer Goods business with Hair Care, Hair Colorants, Hair Styling, Body Care, Skin Care and Oral Care, as well as the professional Hair Salon business. Laundry & Home Care The Laundry & Home Care segment covers the global activities of Henkel in laundry and home care branded consumer goods. The Laundry Care business includes not only heavy-duty and specialty detergents but also fabric softeners, laundry perfor- mance enhancers, and other fabric care products. Our Home Care business area encompasses hand and automatic dish- washing products, cleaners for bathroom and WC applications, and household, glass and specialty cleaners. We also offer air fresheners and insect control products for household applica- tions in selected regions. Principles of Group segment reporting In determining the segment results, assets and liabilities, we apply essentially the same principles of recognition and mea- surement as in the consolidated financial statements. We have valued net operating assets in foreign currencies at average exchange rates. The Group measures the performance of its segments on the basis of a segment income variable referred to internally and in our reporting procedures as “adjusted EBIT,” which is calcu- lated by adjusting operating profit (EBIT) for one-time charges and gains and also restructuring expenses. Of the restructuring expenses, 69 million euros (previous year: 61 million euros) is attributable to Adhesive Technologies, 76 million euros (previous year: 94 million euros) to Beauty Care and 90 million euros (previous year: 119 million euros) to Laundry & Home Care. For reconciliation with the figures for the Henkel Group, Group overheads are reported under Corporate together with income and expenses that cannot be allocated to the individual business units. Proceeds transferred between the segments only exist to a negligible extent and are therefore not separately disclosed. Net operating assets, provisions and liabilities are assigned to the segments in accordance with their usage or origin. Where usage or origin is attributable to several segments, allocation is effected on the basis of appropriate ratios and keys. 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 170 Notes to the consolidated financial statements Henkel Annual Report 2017 For regional and geographic analysis purposes, we allocate sales to countries on the basis of the country-of-origin princi- ple. Non-current assets are allocated in accordance with the domicile of the international company to which they pertain. Reconciliation between net operating assets / capital employed and financial statement figures in million euros Goodwill at book value Other intangible assets and property, plant and equipment (including assets held for sale) Deferred taxes Inventories Trade accounts receivable from third parties Intra-group accounts receivable Other assets and tax refund claims 2 Cash and cash equivalents Operating assets / Total assets Operating liabilities of which: Trade accounts payable to third parties Intra-group accounts payable Other provisions and other liabilities 2 (financial and non-financial) Net operating assets – Goodwill at book value + Goodwill at cost 3 Capital employed Net operating assets Annual average 1 2016 December 31, 2016 Financial statement figures December 31, 2016 9,742 11,647 4 11,647 4 5,833 – 1,818 3,326 1,291 530 22,540 7,104 3,382 1,291 2,431 15,436 9,742 10,201 15,895 6,899 – 1,938 3,349 1,311 630 4 25,774 7,815 3,665 1,311 2,839 17,925 – – – 6,899 1,017 1,938 3,349 – 1,712 4 1,389 27,951 – 3,665 – 3,011 – – – – 1 The annual average is calculated on the basis of the 12 monthly figures. 2 We take only amounts relating to operating activities into account in calculating net operating assets. 3 Before deduction of accumulated impairment pursuant to IFRS 3.79 (b). 4 Adjusted following final allocation of the purchase price for the acquisition of The Sun Products Corporation. Annual average 1 2017 11,601 6,759 – 2,066 3,560 1,520 636 26,142 7,796 3,735 1,520 2,540 18,347 11,601 12,124 18,870 Net operating assets December 31, 2017 161 Financial statement figures December 31, 2017 11,911 11,911 6,828 – 2,080 3,544 1,874 599 26,836 8,063 3,717 1,874 2,472 18,773 – – – 6,828 949 2,080 3,544 – 2,079 916 28,307 – 3,717 – 2,750 – – – – Henkel Annual Report 2017 Notes to the consolidated financial statements 171 36 Earnings per share Earnings per share 2016 2017 162 in million euros (rounded) Reported Adjusted Reported Adjusted Net income attributable to shareholders of Henkel AG & Co. KGaA 2,053 2,323 Dividends, ordinary shares Dividends, preferred shares Total dividends Retained earnings, ordinary shares Retained earnings, preferred shares Retained earnings Number of ordinary shares Dividend per ordinary share in euros of which preliminary dividend per ordinary share in euros 1 Retained earnings per ordinary share in euros Earnings per ordinary share in euros Number of outstanding preferred shares 2 Dividend per preferred share in euros of which preferred dividend per preferred share in euros 1 Retained earnings per preferred share in euros Earnings per preferred share in euros Number of ordinary shares Dividend per ordinary share in euros of which preliminary dividend per ordinary share in euros 1 Retained earnings per ordinary share in euros (after dilution) Diluted earnings per ordinary share in euros 416 283 699 810 544 416 283 699 972 652 1,354 1,624 2,519 460 312 772 1,045 702 1,747 2,534 460 312 772 1,054 708 1,762 259,795,875 259,795,875 259,795,875 259,795,875 1.60 0.02 3.12 4.72 1.60 0.02 3.74 5.34 1.77 3 0.02 4.02 5.79 1.77 3 0.02 4.06 5.83 174,482,323 174,482,323 174,482,323 174,482,323 1.62 0.04 3.12 4.74 1.62 0.04 3.74 5.36 1.79 3 0.04 4.02 5.81 1.79 3 0.04 4.06 5.85 259,795,875 259,795,875 259,795,875 259,795,875 1.60 0.02 3.12 4.72 1.60 0.02 3.74 5.34 1.77 3 0.02 4.02 5.79 1.77 3 0.02 4.06 5.83 Number of potentially outstanding preferred shares 2 174,482,323 174,482,323 174,482,323 174,482,323 Dividend per preferred share in euros of which preferred dividend per preferred share in euros 1 Retained earnings per preferred share in euros (after dilution) Diluted earnings per preferred share in euros 1.62 0.04 3.12 4.74 1.62 0.04 3.74 5.36 1.79 3 0.04 4.02 5.81 1.79 3 0.04 4.06 5.85 1 See combined management report, Corporate governance, Composition of issued capital / Shareholders’ rights on pages 36 and 37. 2 Weighted annual average of preferred shares. 3 Proposal to shareholders for the Annual General Meeting on April 9, 2018. 37 Consolidated statement of cash flows We prepare the consolidated statement of cash flows in accor- dance with International Accounting Standard (IAS) 7 State- ment of Cash Flows. It describes the flow of cash and cash equivalents by origin and usage of liquid funds, distinguishing between changes in funds arising from operating activities, investing activities, and financing activities. Financial funds include cash on hand, checks and credit at banks, and other financial assets with a remaining term of not more than three months. Securities are therefore included in financial funds, provided that they are available at short term and are only exposed to an insignificant price change risk. The computa- tion is adjusted for effects arising from currency translation. In some countries, there are administrative hurdles to the transfer of money to the parent company. Cash flows from operating activities are determined by ini- tially adjusting operating profit for non-cash variables such as amortization / depreciation / impairment / write-ups on intan- gible assets and property, plant and equipment – supplemented by changes in provisions, changes in other assets and liabili- ties, and also changes in net working capital. We disclose payments made for income taxes under operating cash flow. 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 172 Notes to the consolidated financial statements Henkel Annual Report 2017 Cash flows from investing activities occur essentially as a result of outflows of funds for investments in intangible assets and property, plant and equipment, subsidiaries and other business units, as well as investments accounted for by the equity method, and joint ventures. Here, we also recognize inflows of funds from the sale of intangible assets and property, plant and equipment, subsidiaries and other business units. In the reporting period, cash flows from investing activities mainly involved outflows for the acquisition of subsidiaries and other business units in the amount of –1,830 million euros (previous year: – 3,727 million euros), as well as outflows for investments in intangible assets and property, plant and equipment, including payments on account, in the amount of –700 million euros (previous year: – 557 million euros). Outflows for the acquisition of subsidiaries and other busi- ness units relate to the acquisitions as described in the section “Acquisitions and divestments” on pages 116 and 117. In cash flow from financing activities, we recognize interest and dividends paid and received, the change in borrowings and in pension provisions, and also payments made for the acquisition of non-controlling interests and other financing transactions. Free cash flow indicates how much cash is actually available for acquisitions and dividends, reducing debt and / or alloca- tions to pension funds. Reconciliation of assets and liabilities reflected in cash flow from financing activities Derivative assets and liabilities Securities, time deposits and financial colla- teral provided Receivable from Henkel Trust e.V. and reim- bursement rights Provisions for pensions and similar obligations Borrowings Finance lease commitments 163 Total in million euros At January 1, 2017 Change in cash flow from financing activities 3 of which: Interest paid Issuance of bonds Other changes in borrowings Allocations to pension funds Other changes in pension obligations Other financing transactions Interest expense / income Purchase or sale of subsidiaries Foreign exchange Changes in fair value Sundry At December 31, 2017 1 354 – 2 – 360 – – – 4 2 – – – 382 – – 25 9 231 – – – – – 231 0 – – – – 240 616 104 – – – – 104 – 4 – – 11 4 – 717 – 1,007 – 3,725 – 17 – 4,123 72 – – – 112 – 40 – – 15 – 44 52 190 – 8 – 886 51 – 535 – 402 – – – – 57 – 4 69 259 – 2 0 – 2 – – – 0 – 2 – – – 123 49 1 – 535 – 40 2 112 64 227 2 – 66 – 48 112 71 – 8 – 760 – 4,344 – 13 – 4,185 1 Does not include cash outflow of 7 million euros for fees and other financial charges relating to the procurement of money and loans. 2 Differs from the cash flow statement due to currency differences and currency results of intra-group financing and capital transactions. 3 The received interest disclosed in the cash flow from financing activities is mainly attributable to cash and cash equivalents; their reconciliation is derived from the cash flow statement. Henkel Annual Report 2017 Notes to the consolidated financial statements 173 38 Contingent liabilities Finance lease commitments 2017 167 Analysis in million euros Liabilities under guarantee and warranty agreements 164 December 31, 2016 December 31, 2017 5 10 39 Lease and other unrecognized financial commitments Operating leases as defined in IAS 17 comprise all forms of rights of use of assets, including rights of use arising from rent and leasehold agreements. Payment commitments under operating lease agreements are shown at the total amounts payable up to the earliest date of termination. The amounts shown are the nominal values. At December 31, 2017, they were due for payment as follows: Operating lease commitments 165 in million euros Due in the following year Due within 1 to 5 years Due after 5 years Total December 31, 2016 December 31, 2017 98 162 144 404 79 168 147 394 Within the Group, we primarily lease office space and equip- ment, automobiles, and IT equipment. Some of these contracts contain extension options and price adjustment clauses. In the course of fiscal 2017, 80 million euros became due for pay- ment under operating leases (previous year: 75 million euros). Finance lease commitments 2016 166 in million euros At Dec. 31, 2016 Due in the following year Due within 1 to 5 years Due after 5 years Total Future pay- ments relating to finance lease commitments Interest portion Present value of future lease installments 2 10 7 19 0 2 1 3 2 9 6 17 in million euros At Dec. 31, 2017 Due in the following year Due within 1 to 5 years Due after 5 years Total Future pay- ments relating to finance lease commitments Interest portion Present value of future lease installments 2 7 6 15 0 1 0 1 2 6 5 13 As of the end of 2017, commitments arising from orders for property, plant and equipment amounted to 68 million euros (previous year: 68 million euros). As of the reporting date, payment commitments under the terms of agreements for capital increases and share purchases contracted prior to December 31, 2017 amounted to 4 million euros (previous year: 4 million euros). 40 Voting rights / Related party disclosures Related parties as defined by IAS 24 Related Party Disclosures are legal entities or natural persons who may be able to exert influence on Henkel AG & Co. KGaA and its subsidiaries, or be subject to control or material influence by Henkel AG & Co. KGaA or its subsidiaries. These mainly include all members of the Henkel family share-pooling agreement, the non-consoli- dated affiliated companies in which Henkel holds shares, the associated companies, and the members of the corporate bod- ies of Henkel AG & Co. KGaA, whose remuneration is explained in the remuneration report on pages 46 to 57. Related parties as defined in IAS 24 also include Henkel Trust e.V. and Metzler Trust e.V. Information required by Section 160 (1) number 8 German Stock Corporation Act [AktG]: Henkel AG & Co. KGaA, Düsseldorf, has been notified that on December 17, 2015 the proportion of voting rights held by the members of the Henkel family share-pooling agreement repre- sented in total a share of 61.02 percent of the voting rights (158,535,741 votes) in Henkel AG & Co. KGaA (International Securities Identification Number [ISIN]: DE0006048408), held by 108 Consolidated statement of financial position110 Consolidated statement of income110 Consolidated statement of comprehensive income111 Consolidated statement of changes in equity112 Consolidated statement of cash flows113 Group segment report114 Key financials by region115 Accounting principles and methods applied in preparation of the consolidated financial statements125 Notes to the consolidated statement of financial position162 Notes to the consolidated statement of income167 Other disclosures175 Subsequent events 174 Notes to the consolidated financial statements Henkel Annual Report 2017 • 131 members of the families of the descendants of Fritz Henkel, the company’s founder, • four foundations set up by members of those families, • three trusts set up by members of those families, • two private limited companies (GmbH) set up by members of those families, 13 limited partnerships with a limited company as general partner (GmbH & Co. KG), and one lim- ited partnership (KG), under the terms of a share-pooling agreement per Section 22 (2) German Securities Trading Act [WpHG], whereby the shares held by the two private limited companies, by the 13 limited partnerships with a limited company as general partner, and by the one limited partnership, representing a percentage of 16.97 percent of the voting rights (44,081,965 votes), are also attributed (per Section 22 (1) (1) WpHG) to the family members who control those companies. No party to the share-pooling agreement is obliged to notify that it has reached or exceeded 3 percent or more of the total voting rights in Henkel AG & Co. KGaA, even after adding voting rights expressly granted under the terms of usufruct agreements. Dr. Simone Bagel-Trah, Germany, is the authorized representa- tive of the parties to the Henkel family share-pooling agree- ment (latest notification: November 5, 2014). Financial receivables from and payables to other investments in the form of non-consolidated affiliated entities and associ- ated entities are disclosed in Notes 3 and 18. Henkel Trust e.V. and Metzler Trust e.V., as parties to relevant contractual trust arrangements (CTA), hold the assets required to cover the pension obligations in Germany. The claim on Henkel Trust e.V. for reimbursement of pension payments made is shown under other financial assets (Note 3 on page 131). The receivable does not bear interest. 41 Exercise of exemption options Adopting the same approuch as in 2016, the following German companies included in the consolidated financial statements of Henkel AG & Co. KGaA exercised exemption options in fiscal 2017: • Schwarzkopf Henkel Production Europe GmbH & Co. KG, Düsseldorf (Section 264b German Commercial Code [HGB]) • Henkel Loctite-KID GmbH, Hagen (Section 264 (3) HGB) • Henkel IP Management and IC Services GmbH, Monheim (Section 264 (3) HGB) • The Bergquist Company GmbH, Halstenbek (Section 264 (3) HGB) • Sonderhoff Services GmbH, Cologne (Section 264 (3) HGB) • Sonderhoff Chemicals GmbH, Cologne (Section 264 (3) HGB) • Sonderhoff Holding GmbH, Cologne (Section 264 (3) HGB) The Dutch company Henkel Nederland B.V., Nieuwegein, exer- cised the exemption option afforded in Article 2:403 of the Civil Code of the Netherlands. 42 Remuneration of the corporate bodies The total remuneration of the members of the Supervisory Board and of the Shareholders’ Committee of Henkel AG & Co. KGaA amounted to 1,565,000 euros plus value-added tax (previous year: 1,572,896 euros) and 2,215,754 euros (previous year: 2,350,000 euros), respectively. The total remuneration (Section 285 (9a) and Section 314 (1) (6a) HGB) of the Manage- ment Board and members of the Management Board of Henkel Management AG amounted to 25,326,382 euros (previous year: 26,503,197 euros). For pension obligations to former members of the Management Board and the management of Henkel KGaA, as well as the former management of its legal predecessor and surviving dependents, 102,214,945 euros (previous year: 100,771,135 euros) is deferred. The total remuneration for this group of persons (Section 285 (9b) and Section 314 (1) (6b) HGB) in the reporting year amounted to 7,265,411 euros (previous year: 7,127,205 euros). For further details regarding the compensation of the corporate bodies, please refer to the audited remuneration report on pages 46 to 57. 43 Declaration of compliance with the Corporate Governance Code [DCGK] In February 2017, the Management Board of Henkel Manage- ment AG, and the Supervisory Board and Shareholders’ Com- mittee of Henkel AG & Co. KGaA approved a joint declaration of compliance with the recommendations of the German Corporate Governance Code [DCGK] in accordance with Sec- tion 161 German Stock Corporation Act [AktG]. The declaration has been made permanently available to shareholders on the company website: www.henkel.com/ir Henkel Annual Report 2017 Notes to the consolidated financial statements 175 108 Consolidated statement of 111 Consolidated statement of financial position changes in equity 110 Consolidated statement of 112 Consolidated statement of income 110 Consolidated statement of comprehensive income cash flows 113 Group segment report 114 Key financials by region 115 Accounting principles and methods applied in preparation of the consolidated financial statements 125 Notes to the consolidated statement of financial position 162 Notes to the consolidated statement of income 167 Other disclosures 175 Subsequent events Fees for tax advisory services mainly relate to those performed in connection with intra-group restructuring procedures under company law, the audit of the tax compliance manage- ment system, and provision of support on ongoing tax issues. Other services mainly comprised advisory services relating to cyber and IT security, an audit performed as part of a project to update the treasury system software, services focusing on the implementation of regulatory requirements, and other project- related advisory services. Subsequent events After December 31, 2017, there were no reportable events of particular significance for the net assets, financial position and results of operations of the Henkel Group. 168 44 Subsidiaries and other investments Details relating to the investments held by Henkel AG & Co. KGaA and the Henkel Group, which are part of these financial statements, are provided in a separate schedule appended to these notes to the consolidated financial statements but not included in the printed form of the Annual Report. Said sched- ule is included in the accounting record submitted for publi- cation in the electronic federal gazette and can be viewed there and at the Annual General Meeting. The schedule is also pub- lished on our website: www.henkel.com/reports 45 Auditor’s fees and services The total fees charged to the Group for services provided by the auditor KPMG AG Wirtschaftsprüfungsgesellschaft and other companies of the worldwide KPMG network in fiscal 2016 and 2017 were as follows: Type of fee in million euros Audits Other audit-related services Tax advisory services Other services Total 2016 10.8 0.4 1.2 0.2 12.6 of which Germany 2017 of which Germany 2.6 0.3 0.2 0.1 3.2 10.3 0.5 1.0 0.8 12.6 2.5 0.3 0.3 0.8 3.9 The financial statement auditing services provided by KPMG AG relate primarily to their audits of the annual and consoli- dated financial statements of Henkel AG & Co. KGaA, together with various audits of annual financial statements of its sub- sidiaries. Reviews of interim financial statements were also included in the audit mandate. Other attestation services included the provision of a comfort letter in connection with the issuance of a bond, and the per- formance of legally and contractually stipulated audits such as those specified in Section 20 Securities Trading Act [WpHG] in relation to the European Market Infrastructure Regulation (EMIR). These fees also covered audits of parts of the compliance management system and the audit of the non-financial report. Düsseldorf, January 30, 2018 Henkel Management AG, Personally Liable Partner of Henkel AG & Co. KGaA Management Board Hans Van Bylen, Jan-Dirk Auris, Carsten Knobel, Kathrin Menges, Bruno Piacenza, Jens-Martin Schwärzler 176 Henkel Annual Report 2017 Independent Auditor’s Report To Henkel AG & Co. KGaA, Düsseldorf Report on the Audit of the Consolidated Financial Statements and of the Group Management Report Opinions We have audited the consolidated financial statements of Henkel AG & Co. KGaA and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 2017, and the consolidated statement of income, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the financial year from January 1 to December 31, 2017, and notes to the consolidated financial statements, including a summary of significant accounting policies. In addition, we have audited the group management report of Henkel AG & Co. KGaA for the financial year from January 1 to December 31, 2017. In accordance with the German legal requirements we have not audited the content of the Group’s corporate governance statement which is included in section “Fundamental principles of the Group” of the group management report. In our opinion, on the basis of the knowledge obtained in the audit, • the accompanying consolidated financial statements comply, in all material respects, with the IFRSs as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315e (1) HGB [Handelsgesetzbuch: German Commercial Code] and, in compliance with these requirements, give a true and fair view of the assets, liabili- ties, and financial position of the Group as at December 31, 2017, and of its financial performance for the financial year from January 1 to December 31, 2017, and • the accompanying group management report as a whole provides an appropriate view of the Group’s position. In all material respects, this group management report is consis- tent with the consolidated financial statements, complies with German legal requirements and appropriately presents the opportunities and risks of future development. Our opinion on the group management report does not cover the content of the Group’s corporate governance statement mentioned above. Pursuant to Section 322 (3) sentence 1 HGB, we declare that our audit has not led to any reservations relating to the legal com- pliance of the consolidated financial statements and of the group management report. Note: This is a translation of the German original. Solely the original text in German language is authoritative. Basis for the Opinions We conducted our audit of the consolidated financial state- ments and of the group management report in accordance with Section 317 HGB and the EU Audit Regulation No. 537/2014 (referred to subsequently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Our responsibilities under those requirements and principles are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report” section of our auditor’s report. We are independent of the group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these require- ments. In addition, in accordance with Article 10 (2) point (f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5 (1) of the EU Audit Regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinions on the consolidated financial statements and on the group management report. Key Audit Matters in the Audit of the Consolidated Finan- cial Statements Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the con- solidated financial statements for the financial year from January 1 to December 31, 2017. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon; we do not provide a separate opinion on these matters. Recoverability of the carrying amount of goodwill and intangible assets with indefinite useful lives See Note 1 in the notes to the consolidated financial statements for explanations on goodwill and intangible assets with indefinite useful lives THE FINANCIAL STATEMENT RISK In the consolidated financial statements of Henkel AG & Co. KGaA as of December 31, 2017, goodwill of EUR 11,911 million and brands and other rights with indefinite useful lives of EUR 2,869 million are reported. Goodwill and intangible assets with Henkel Annual Report 2017 177 As even small changes in the cost of capital materially affect the fair value, we involved our valuation specialists and focused on the assumptions and data used to determine the weighted average cost of capital and also verified the calculation procedure. This also involved comparisons with the peer group relevant to Henkel as regards the cost of equity utilized. In addition, we conducted our own sensitivity analyses for the cash-generating units to establish the effects of incremental changes to assump- tions on the measurement of goodwill and intangible assets. Finally, for the purposes of an overall assessment, we compared the total calculated fair values less costs to sell for the individual cash-generating units with the current market capitalization of the Henkel Group. We also assessed whether the disclosures required pursuant to IAS 36 in the notes to the consolidated financial statements are appropriate. OUR CONCLUSIONS The calculation model used by Henkel AG & Co. KGaA for impairment testing of goodwill and intangible assets with indefinite useful lives is appropriate and consistent with the applicable accounting policies. The assumptions used for the measurement of goodwill and intangible assets with indefinite useful lives are generally reasonable as a whole. The related disclosures in the notes to the consolidated financial statements are appropriate. Accounting of acquisitions made in the financial year See pages 116 and 117 in the notes to the consolidated financial statements for information on acquisitions made in the financial year THE FINANCIAL STATEMENT RISK In the 2017 financial year, Henkel made acquisitions totaling EUR 1,906 million. The assets and liabilities acquired were recognized at fair value at the date of acquisition. Goodwill is recognized as the remaining portion of the purchase price that is not allocated to the acquired assets and liabilities as part of the purchase price allocation. indefinite useful lives are allocated to the cash-generating units that are expected to benefit from the business combination in which the goodwill arose or from the utilization of the intangible assets. Concerning goodwill, these cash-generating units are generally represented by the strategic business units, while the Beauty Care and Laundry & Home Care brands are allocated to regional business units. In performing the impairment test for goodwill and intangible assets with indefinite useful lives, which is conducted annually, the carrying amounts of the respective cash-generating units are compared with their respective recoverable amounts. The recover- able amount is determined at Henkel based on fair value less costs to sell. For this purpose, fair value is determined using a discounted cash flow model. Future cash flows are derived from the Henkel Group‘s financial plan, which is prepared by manage- ment and approved by the Supervisory Board, and which is extrapolated for subsequent years using assumptions about perpetuity growth rates. Future cash flows are discounted using the weighted average cost of capital of the respective cash-generating unit. This measurement is highly dependent on estimates of future cash flows as well as on the cost of capital used and therefore subject to considerable uncertainty. In this context and due to the underlying complexity of the valu- ation models there is a risk that impairment of goodwill and of intangible assets with indefinite useful lives existing as of the reporting date is not recognized. There is also a risk that the disclosures in the notes to the consolidated financial statements of Henkel AG & Co. KGaA associated herewith are not appropriate. OUR AUDIT APPROACH Our audit included an evaluation of the methodical approach to conducting the impairment tests and a verification of the computational accuracy of the model. Through a comparison with the assumptions from the financial plan and reconciliation with the expected developments in the relevant markets derived from market analysis, among others, we confirmed the appropriateness of the future cash flows that were used. We conducted interviews in the business units to obtain information on key drivers of future development, for example the launch of new products, and to estimate their effects on the forecasts for the cash flows. We assessed the appropriateness of the estimated perpetuity growth rates using relevant market analysis. We also confirmed adherence to budget by making a retrospective comparison. Furthermore, we evaluated Henkel’s planning process by surveying those responsible for the process and verifying the process steps. Note: This is a translation of the German original. Solely the original text in German language is authoritative. 178 Henkel Annual Report 2017 For individual assets acquired, especially brands, technologies and customer relationships, no observable market values are available. To determine the corresponding fair values, complex valuation models based on assumptions are used. This measurement is highly dependent on estimates of future cash flows as well as the cost of capital applied and, due to judgment, subject to considerable uncertainty. In this context and due to the underlying complexity of the valuation models, there is a risk for the financial statements that the fair values (particularly of intangible assets) have not been determined appropriately. There is also a risk that the disclosures in the notes to the consolidated financial statements as required by IFRS 3 are not appropriate. OUR AUDIT APPROACH We confirmed the qualifications and objectivity of the experts engaged by Henkel to perform the purchase price allocation. With the support of our valuation specialists, we also assessed the appropriateness of the valuation models and of the business plans underlying the measurement. This involved assessing the mathematical accuracy of the valuation models and also evaluating the expectations of the future short-, medium- and long-term development of revenue and costs by comparing them with external market data and interviewing management. During our audit, we also focused on detecting the value drivers for the identified intangible assets to be measured. In this regard, we analyzed whether the assumptions for the value drivers for brands (useful life, license fees, risk premiums) and customer relationships (grouping of customers, duration, reduction rates, risk premiums) were appropriate and consis- tent with observable market parameters. For the goodwill resulting from the purchase price allocation, we analyzed the key synergy drivers and assessed them based on the information and supporting documents provided to us. We also focused on the assumptions and parameters used to determine the weighted average cost of capital, particularly whether the determination of the peer group to derive the cost of equity was appropriate, and evaluated the calculation procedure. Furthermore, we assessed whether the disclosures required pursuant to IFRS 3 in the notes to the consolidated financial statements were complete and appropriate. OUR CONCLUSIONS The purchase price allocations included in the consolidated financial statements were performed appropriately as a whole, on the basis of suitable valuation models, assumptions and data. The disclosures in the notes to the consolidated financial statements are complete and appropriate. Explanation to the reconciliation of performance measures in segment reporting See segment reporting, Note 32 in the notes to the consolidated financial statements for an explanation to the reconciliation of performance measures THE FINANCIAL STATEMENT RISK Revenue growth and return on sales, as well as earnings per share, are adjusted for the purposes of management and analysis. In the consolidated financial statements of Henkel AG & Co. KGaA, nominal revenue growth of 7.0 percent is adjusted for exchange rate effects (2.0 percentage points) and for effects from acquisitions and divestments (– 5.9 percentage points) to organic growth of 3.1 percent, and EBIT of EUR 3,055 million is adjusted by EUR 406 million to EUR 3,461 million. The adjusted return on sales is 17.3 percent. Organic revenue growth, adjusted EBIT and adjusted return on sales are presented in segment reporting and explained in the notes to the consoli- dated financial statements. There is a risk that the adjustments made are not appropriately presented in the notes to the consolidated financial statements. OUR AUDIT APPROACH We verified the derivation of the performance measures from the Group’s accounting and critically analyzed the adjustments accounted for. We assessed whether the adjustments made were consistent with the information and explanations provided to us, in line with the audit findings and appropriately presented in the notes to the consolidated financial statements. OUR CONCLUSIONS The reconciling items of segment reporting on the performance measures of organic growth, adjusted EBIT and adjusted return on sales are appropriately presented in the notes to the consolidated financial statements. Note: This is a translation of the German original. Solely the original text in German language is authoritative. Henkel Annual Report 2017 179 Other Information Management is responsible for the other information. The other information comprises: • the Group’s corporate governance statement, and • the remaining parts of the annual report, with the exception of the audited consolidated financial statements and group management report and our auditor’s report. Our opinions on the consolidated financial statements and on the group management report do not cover the other informa- tion, and consequently we do not express an opinion or any other form of assurance conclusion thereon. In connection with our audit, our responsibility is to read the other information and, in so doing, to consider whether the other information • is materially inconsistent with the consolidated financial statements, with the group management report or our knowledge obtained in the audit, or • otherwise appears to be materially misstated. Responsibilities of Management and the Supervisory Board for the Consolidated Financial Statements and the Group Management Report Management is responsible for the preparation of the consolidated financial statements that comply, in all material respects, with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e (1) HGB and that the consolidated financial statements, in compliance with these requirements, give a true and fair view of the assets, liabilities, financial position, and financial performance of the Group. In addition, management is responsible for such internal control as they have determined necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern. They also have the responsibility for disclosing, as applicable, matters related to going concern. In addition, they are responsible for financial reporting based on the going concern basis of accounting unless there is an intention to liquidate the Group or to cease operations, or there is no realistic alternative but to do so. Furthermore, management is responsible for the preparation of the group management report that, as a whole, provides an appropriate view of the Group’s position and is, in all material respects, consistent with the consolidated financial statements, complies with German legal requirements, and appropriately presents the opportunities and risks of future development. In addition, management is responsible for such arrangements and measures (systems) as they have considered necessary to enable the preparation of a group management report that is in accor- dance with the applicable German legal requirements, and to be able to provide sufficient appropriate evidence for the assertions in the group management report. The supervisory board is responsible for overseeing the Group’s financial reporting process for the preparation of the consoli- dated financial statements and of the group management report. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Group Management Report Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and whether the group management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the consolidated financial statements and the knowledge obtained in the audit, complies with the German legal requirements and appropriately presents the opportunities and risks of future development, as well as to issue an auditor’s report that includes our opinions on the consolidated financial statements and on the group management report. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Section 317 HGB and the EU Audit Regulation and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer (IDW) will always detect a material misstatement. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and this group management report. Note: This is a translation of the German original. Solely the original text in German language is authoritative. 180 Henkel Annual Report 2017 We exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements and of the group manage- ment report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit of the consolidated financial statements and of arrange- ments and measures (systems) relevant to the audit of the group management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of these systems. • Evaluate the appropriateness of accounting policies used by management and the reasonableness of estimates made by management and related disclosures. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the consolidated financial statements and in the group management report or, if such disclosures are inadequate, to modify our respective opinions. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to be able to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements present the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and financial per- formance of the Group in compliance with IFRSs as adopted by the EU and the additional requirements of German commercial law pursuant to Section 315e (1) HGB. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express opinions on the consolidated financial statements and on the group management report. We are responsible for the direction, supervision and per- formance of the group audit. We remain solely responsible for our opinions. • Evaluate the consistency of the group management report with the consolidated financial statements, its conformity with German law, and the view of the Group’s position it provides. • Perform audit procedures on the prospective information presented by management in the group management report. On the basis of sufficient appropriate audit evidence we evaluate, in particular, the significant assumptions used by management as a basis for the prospective information, and evaluate the proper derivation of the prospective information from these assumptions. We do not express a separate opinion on the prospective information and on the assumptions used as a basis. There is a substantial unavoidable risk that future events will differ materially from the prospective information. We communicate with those charged with governance regard- ing, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with the relevant independence requirements, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, the related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial state- ments of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter. Note: This is a translation of the German original. Solely the original text in German language is authoritative. Henkel Annual Report 2017 181 Other Legal and Regulatory Requirements Further Information pursuant to Article 10 of the EU Audit Regulation We were elected as group auditor by the annual general meeting on April 6, 2017. We were engaged by the supervisory board, represented by the Audit Committee Chair, on July 5, 2017. We have been the group auditor of Henkel AG & Co. KGaA without interruption for more than 25 years. We declare that the opinions expressed in this auditor’s report are consistent with the additional report to the audit committee pursuant to Article 11 of the EU Audit Regulation (long-form audit report). German Public Auditor Responsible for the Engagement The German Public Auditor responsible for the engagement is Marcus Rohrbach. Düsseldorf, January 30, 2018 KPMG AG Wirtschaftsprüfungsgesellschaft Klaus Becker Wirtschaftsprüfer Marcus Rohrbach Wirtschaftsprüfer Note: This is a translation of the German original. Solely the original text in German language is authoritative. 182 Henkel Annual Report 2017 Recommendation for the approval of the annual financial statements and the appropriation of the profit of Henkel AG & Co. KGaA It is proposed that the annual financial statements of Henkel AG & Co. KGaA be approved as presented and that the unappropriated profit of 1,435,475,690.42 euros for fiscal 2017 be applied as follows: a) Payment of a dividend of 1.77 euros per ordinary share (259,795,875 shares) b) Payment of a dividend of 1.79 euros per preferred share (178,162,875 shares) c) Carried forward as retained earnings = 459,838,698.75 euros = 318,911,546.25 euros = 656,725,445.42 euros 1,435,475,690.42 euros According to Section 71b German Stock Corporation Act [AktG], treasury shares do not qualify for a dividend. The amount in unappropriated profit which relates to the shares held by the corporation (treasury shares) at the date of the Annual General Meeting will be carried forward as retained earnings. As the number of such treasury shares can change up to the time of the Annual General Meeting, a correspondingly adapted proposal for the appropriation of profit will be submitted to it, providing for an unchanged payout of 1.77 euros per ordinary share qualifying for a dividend and 1.79 euros per preferred share qualifying for a dividend, with corresponding adjustment of the payout totals and of retained earnings carried forward to the following year. Düsseldorf, January 30, 2018 Henkel Management AG, Personally Liable Partner of Henkel AG & Co. KGaA Management Board Henkel Annual Report 2017 183 Responsibility statement by the Personally Liable Partner To the best of our knowledge, and in accordance with the applicable accounting princi- ples, the consolidated financial statements give a true and fair view of the net assets, financial position and results of operations of the Group, and the management report of the Group, which is combined with the management report of Henkel AG & Co. KGaA, includes a fair review of the development, performance and results of the business and the position of the Group, together with a cogent description of the principal opportuni- ties and risks associated with the expected development of the Group. Düsseldorf, January 30, 2018 Henkel Management AG Management Board Hans Van Bylen, Jan-Dirk Auris, Carsten Knobel, Kathrin Menges, Bruno Piacenza, Jens-Martin Schwärzler 184 Notes to the consolidated financial statements Henkel Annual Report 2017 Corporate bodies of Henkel AG & Co. KGaA Boards / memberships as defined by Section 125 (1) sentence 5 German Stock Corporation Act [AktG] as at November 2017 Honorary Chairman of the Henkel Group: Dipl.-Ing. Albrecht Woeste Supervisory Board of Henkel AG & Co. KGaA Dr. rer. nat. Simone Bagel-Trah Chair, Private Investor, Düsseldorf Born in 1969 Member since: April 14, 2008 Memberships: Henkel Management AG (Chair) 1 Henkel AG & Co. KGaA (Shareholders’ Committee, Chair) 2 Bayer AG 1 Heraeus Holding GmbH 1 Winfried Zander * Vice Chair, Chairman of the General Works Council of Henkel AG & Co. KGaA and Chairman of the Works Council of Henkel AG & Co. KGaA, Düsseldorf site Born in 1954 Member since: May 17, 1993 Jutta Bernicke * Member of the Works Council of Henkel AG & Co. KGaA, Düsseldorf site Born in 1962 Member since: April 14, 2008 Dr. rer. nat. Kaspar von Braun Astrophysicist, Pasadena Born in 1971 Member since: April 19, 2010 Johann-Christoph Frey Private Investor, Klosters Born in 1955 Member since: April 11, 2016 Peter Hausmann * Member of the Executive Board of IG Bergbau, Chemie, Energie and responsible for Wages / Finance, Hannover Born in 1954 Member since: April 15, 2013 Memberships: Continental AG 1 Covestro AG 1 Vivawest GmbH (Vice Chair) 1 50 Hertz Transmission AG (Vice Chair) 1 Birgit Helten-Kindlein * Member of the Works Council of Henkel AG & Co. KGaA, Düsseldorf site Born in 1964 Member since: April 14, 2008 Benedikt-Richard Freiherr von Herman Private Investor, Wain Born in 1972 Member since: April 11, 2016 Timotheus Höttges Chairman of the Executive Board, Deutsche Telekom AG, Bonn Born in 1962 Member since: April 11, 2016 Memberships: BT Group plc, Great Britain 2 FC Bayern München AG 1 Telekom Group: Telekom Deutschland GmbH (Chair) 1 T-Mobile US, Inc. (Chair), USA 2 Prof. Dr. sc. nat. Michael Kaschke Chairman of the Executive Board, Carl Zeiss AG, Oberkochen Born in 1957 Member since: April 14, 2008 Memberships: Deutsche Telekom AG 1 Robert Bosch GmbH 1 Carl Zeiss Group: Carl Zeiss Industrielle Messtechnik GmbH (Chair) 1 Carl Zeiss Meditec AG (Chair) 1 Carl Zeiss SMT GmbH (Chair) 1 Carl Zeiss Australia Pty. Ltd. (Chair), Australia 2 Carl Zeiss Far East Co. Ltd. (Chair), China / Hong Kong 2 Carl Zeiss India (Bangalore) Private Ltd., India 2 Carl Zeiss Pte. Ltd. (Chair), Singapore 2 * Employee representatives. 1 Membership of statutory supervisory and administrative boards in Germany. 2 Membership of comparable oversight bodies. Henkel Annual Report 2017 Notes to the consolidated financial statements 185 Angelika Keller* Member of the General Works Council of Henkel AG & Co. KGaA and Chairwoman of the Works Council of Henkel AG & Co. KGaA, Munich site Andrea Pichottka * Managing Director, IG BCE Bonusagentur GmbH, Hannover Managing Director, IG BCE Bonusassekuranz GmbH, Hannover Born in 1965 Member since: January 1, 2017 Born in 1959 Member since: October 26, 2004 Barbara Kux Private Investor, Zurich Born in 1954 Member since: July 3, 2013 Memberships: Engie S.A., France 2 Firmenich S.A. (Vice Chair), Switzerland 2 Pargesa Holding S.A., Switzerland 2 Dr. rer. nat. Martina Seiler * Chemist, Duisburg Chairwoman of the General Senior Staff Representative Committee and of the Senior Staff Representative Committee of Henkel AG & Co. KGaA Born in 1971 Member since: January 1, 2012 Prof. Dr. oec. publ. Theo Siegert Managing Partner of de Haen-Carstanjen & Söhne, Düsseldorf Born in 1947 Member since: April 20, 2009 Memberships: E.ON SE 1 Merck KGaA 1 DKSH Holding Ltd., Switzerland 2 E. Merck OHG 2 Edgar Topsch * Member of the General Works Council of Henkel AG & Co. KGaA and Vice Chairman of the Works Council of Henkel AG & Co. KGaA, Düsseldorf site Born in 1960 Member since: August 1, 2010 Supervisory Board committees Nominations Committee Audit Committee Functions The Nominations Committee prepares the resolutions of the Supervisory Board on election proposals to be presented to the Annual General Meeting for the election of members of the Supervisory Board (representatives of the share holders). Members Dr. Simone Bagel-Trah, Chair Dr. Kaspar von Braun Prof. Dr. Theo Siegert Functions The Audit Committee prepares the proceedings and resolutions of the Supervi- sory Board relating to the approval of the annual financial statements and the consolidated financial statements, and relating to ratification of the proposal to be put before the Annual General Meeting regarding appointment of the audi- tor. It also deals with accounting, risk management and compliance issues. Members Prof. Dr. Theo Siegert, Chair Prof. Dr. Michael Kaschke, Vice Chair Dr. Simone Bagel-Trah Peter Hausmann Birgit Helten-Kindlein Winfried Zander 186 Notes to the consolidated financial statements Henkel Annual Report 2017 Shareholders’ Committee of Henkel AG & Co. KGaA Stefan Hamelmann Private Investor, Düsseldorf Born in 1963 Member since: May 3, 1999 Prof. Dr. rer. pol. Ulrich Lehner Former Chairman of the Management Board of Henkel KGaA, Düsseldorf Born in 1946 Member since: April 14, 2008 Memberships: Deutsche Telekom AG (Chair) 1 E.ON SE 1 Porsche Automobil Holding SE 1 ThyssenKrupp AG (Chair) 1 Dr.-Ing. Dr.-Ing. E.h. Norbert Reithofer Chairman of the Supervisory Board of Bayerische Motoren Werke Aktiengesellschaft, Munich Born in 1956 Member since: April 11, 2011 Memberships: Bayerische Motoren Werke Aktiengesellschaft (Chair) 1 Siemens AG 1 Konstantin von Unger Managing Director, CKA Capital Limited, London Born in 1966 Member since: April 14, 2003 Membership: Henkel Management AG 1 Jean-François van Boxmeer Chairman of the Executive Board of Heineken N.V., Amsterdam Born in 1961 Member since: April 15, 2013 Membership: Mondelez International Inc., USA 2 Werner Wenning Chairman of the Supervisory Board of Bayer AG, Leverkusen Born in 1946 Member since: April 14, 2008 Memberships: Bayer AG (Chair) 1 Henkel Management AG 1 Siemens AG 1 Dr. rer. nat. Simone Bagel-Trah Chair, Private Investor, Düsseldorf Born in 1969 Member since: April 18, 2005 Memberships: Henkel AG & Co. KGaA (Chair) 1 Henkel Management AG (Chair) 1 Bayer AG 1 Heraeus Holding GmbH 1 Dr. rer. pol. h.c. Christoph Henkel Vice Chair, Founding Partner, Canyon Equity LLC, London Born in 1958 Member since: May 27, 1991 Prof. Dr. oec. HSG Paul Achleitner Chairman of the Supervisory Board, Deutsche Bank AG, Munich Born in 1956 Member since: April 30, 2001 Memberships: Bayer AG 1 Daimler AG 1 Deutsche Bank AG (Chair) 1 Boris Canessa (until April 30, 2017) Private Investor, Düsseldorf Born in 1963 Member from: April 11, 2016 Subcommittees of the Shareholders’ Committee Finance Subcommittee Human Resources Subcommittee Functions The Finance Subcommittee deals principally with financial matters, accounting issues including the statutory year-end audit, taxation and accounting policy, internal auditing, and risk management in the company. Functions The Human Resources Subcommittee deals principally with personnel matters relating to members of the Management Board, issues pertaining to human resources strategy, and with remuneration. Members Dr. Christoph Henkel, Chair Stefan Hamelmann, Vice Chair Prof. Dr. Paul Achleitner Prof. Dr. Ulrich Lehner Dr. Dr. Norbert Reithofer Members Dr. Simone Bagel-Trah, Chair Konstantin von Unger, Vice Chair Boris Canessa (until April 30, 2017) Jean-François van Boxmeer Werner Wenning 1 Membership of statutory supervisory and administrative boards in Germany. 2 Membership of comparable oversight bodies. Henkel Annual Report 2017 Notes to the consolidated financial statements 187 Management Board of Henkel Management AG * Hans Van Bylen Chairman of the Management Board Carsten Knobel Finance / Purchasing / Integrated Business Solutions Bruno Piacenza Laundry & Home Care Born in 1961 Member since: July 1, 2005 3 Jan-Dirk Auris Adhesive Technologies Born in 1968 Member since: January 1, 2011 Memberships: Henkel Corporation (Chair), USA 2 Henkel Technology Corporation, USA 2 Pascal Houdayer (until October 31, 2017) Beauty Care Born in 1969 Member from: March 1, 2016 Membership: The Dial Corporation (Chair), USA 2 Born in 1969 Member since: July 1, 2012 Born in 1965 Member since: January 1, 2011 Memberships: Deutsche Lufthansa AG 1 Henkel Central Eastern Europe GmbH (Chair), Austria 2 Henkel (China) Investment Co. Ltd., China 2 Henkel & Cie AG, Switzerland 2 Henkel Ltd., Great Britain 2 Henkel of America Inc. (Chair), USA 2 Kathrin Menges Human Resources / Infrastructure Services Born in 1964 Member since: October 1, 2011 Memberships: Adidas AG 1 Henkel Central Eastern Europe GmbH, Austria 2 Henkel Finland Oy, Finland 2 Henkel Nederland BV, Netherlands 2 Henkel Norden AB, Sweden 2 Membership: Henkel Consumer Goods Inc., USA 2 Jens-Martin Schwärzler (since November 1, 2017) Beauty Care Born in 1963 Member since: November 1, 2017 Memberships: Henkel Consumer Goods Inc., USA 2 Henkel US Distribution Corporation, USA 2 The Dial Corporation, USA 2 The Sun Products Canada Corporation, Canada 2 The Sun Products Corporation, USA 2 Supervisory Board of Henkel Management AG * Dr. rer. nat. Simone Bagel-Trah Chair, Private Investor, Düsseldorf Born in 1969 Member since: February 15, 2008 Memberships: Henkel AG & Co. KGaA (Chair) 1 Henkel AG & Co. KGaA (Shareholders’ Committee, Chair) 2 Bayer AG 1 Heraeus Holding GmbH 1 Konstantin von Unger Vice Chair, Managing Director, CKA Capital Limited, London Werner Wenning Chairman of the Supervisory Board of Bayer AG, Leverkusen Born in 1966 Member since: April 17, 2012 Born in 1946 Member since: September 16, 2013 Membership: Henkel AG & Co. KGaA (Shareholders’ Committee) 2 Memberships: Bayer AG (Chair) 1 Siemens AG 1 Henkel AG & Co. KGaA (Shareholders’ Committee) 2 * Personally Liable Partner of Henkel AG & Co. KGaA. 1 Membership of statutory supervisory and administrative boards in Germany. 2 Membership of comparable oversight bodies. 3 Including membership of the Management Board of Henkel KGaA. in million euros Sales Adhesive Technologies Beauty Care Laundry & Home Care Corporate Henkel Group Marketing, selling and distribution expenses Research and development expenses Administrative expenses Other operating expenses and income EBIT Adhesive Technologies Beauty Care Laundry & Home Care Corporate Henkel Group Interest result Other financial result Investment result Financial result Income before tax Taxes on income Net income 188 Further information Henkel Annual Report 2017 Quarterly breakdown of key financials 169 1st quarter 2nd quarter 3rd quarter 4th quarter Full year 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2,144 950 1,333 30 4,456 2,295 1,011 1,726 32 2,290 988 1,345 31 2,370 997 1,703 29 5,064 4,654 5,098 2,272 968 1,479 29 4,748 2,373 941 1,636 31 4,981 2,255 932 1,638 31 4,856 2,348 920 1,586 32 4,886 8,961 3,838 5,795 121 18,714 – 9,742 8,972 9,387 3,868 6,651 123 20,029 – 10,680 9,349 Cost of sales Gross profit – 2,293 – 2,649 – 2,373 – 2,678 – 2,453 – 2,674 – 2,623 – 2,679 2,163 2,415 2,281 2,420 2,295 2,307 2,233 2,207 – 1,092 – 1,237 – 1,167 – 1,242 – 1,171 – 1,154 – 1,205 – 1,243 – 4,635 – 4,876 – 114 – 225 – 121 – 258 – 118 – 240 – 119 – 248 – 116 – 232 – 114 – 251 – 115 – 365 – 122 – 223 – 463 – 1,062 – 476 – 980 –15 24 1 28 –1 –38 –22 24 –37 38 364 143 236 – 25 717 2 – 9 – – 7 710 – 172 538 431 149 274 – 30 823 – 4 – 9 – – 13 810 – 203 607 403 162 218 – 26 757 2 – 2 – 1 – 1 756 – 184 572 11 561 446 155 265 – 27 839 – 7 1 – – 6 833 – 202 631 423 155 228 – 31 775 – 4 – 11 – – 15 760 427 121 227 – 26 750 – 13 – 6 – 1 – 20 730 – 176 584 – 166 564 371 67 121 – 33 526 – 5 – 4 – 1 – 10 516 – 117 399 353 110 223 – 42 643 – 13 4 – 3 – 12 631 108 739 1,561 1,657 526 803 – 115 2,775 – 5 – 26 – 2 – 33 2,742 – 649 2,093 535 989 – 126 3,055 – 37 – 10 – 4 – 51 3,004 – 463 2,541 7 8 – 8 5 40 22 624 576 564 391 734 2,053 2,519 Attributable to non-controlling interests Attributable to shareholders of Henkel AG & Co. KGaA 13 10 525 597 Earnings per preferred share in million euros EBIT (as reported) One-time gains One-time charges Restructuring expenses Adjusted EBIT Adjusted earnings per preferred share in euros 1.21 1.38 1.30 1.44 1.33 1.30 0.90 1.69 4.74 5.81 1st quarter 2nd quarter 3rd quarter 4th quarter Full year 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 717 – 7 27 751 823 – 19 39 11 854 757 – 1 22 41 819 839 – 2 36 36 909 775 – 27 35 837 750 – 56 91 897 526 – 65 174 765 643 – 51 107 801 2,775 3,055 – 1 121 277 – 21 182 245 3,172 3,461 in euros 1.27 1.41 1.40 1.55 1.42 1.54 1.27 1.35 5.36 5.85 The quarterly figures are specific to the quarter to which they refer and have been rounded for commercial convenience. Calculated on the basis of units of 1,000 euros. Henkel Annual Report 2017 Further information 189 Multi-year summary in million euros Results of operations Sales Adhesive Technologies Beauty Care Laundry & Home Care Corporate Gross margin Research and development expenses Operating profit (EBIT) Adhesive Technologies Beauty Care Laundry & Home Care Corporate Income before tax Tax rate Net income Attributable to shareholders of Henkel AG & Co. KGaA Net return on sales 2 Interest coverage ratio Net assets Total assets Non-current assets Current assets Equity Liabilities Equity ratio Return on equity 4 Operating debt coverage ratio Financial position Cash flow from operating activities Capital expenditures Investment ratio Shares 2011 restated 1 2012 2013 2014 2015 2016 2017 170 15,605 7,746 3,399 4,304 156 16,510 8,256 3,542 4,556 155 16,355 8,117 3,510 4,580 148 16,428 8,127 3,547 4,626 128 18,089 8,992 3,833 5,137 128 18,714 8,961 3,838 5,795 121 20,029 9,387 3,868 6,651 123 45.3 46.8 47.7 47.0 48.2 47.9 46.7 410 1,765 1,002 471 419 – 127 1,610 408 2,199 1,191 483 621 – 97 2,018 415 2,285 1,271 474 682 – 141 2,172 413 2,244 1,345 421 615 – 137 2,195 478 2,645 1,462 561 786 – 164 2,645 463 2,775 1,561 526 803 – 115 2,742 476 3,055 1,657 535 989 –126 3,004 in % 26.0 24.4 1,191 1,526 25.2 1,625 24.3 1,662 24.4 23.7 15.4 1,968 2,093 2,541 1,161 1,480 1,589 1,628 1,921 2,053 2,519 in % 7.6 14.0 9.2 14.3 9.9 23.9 10.1 48.4 10.9 75.7 11.2 107.9 12.7 79.3 18,487 11,848 6,639 8,670 9,817 19,525 11,927 7,598 9,511 10,014 19,344 11,360 7,984 10,158 9,186 20,961 14,150 6,811 11,644 9,317 22,323 15,406 6,917 13,811 8,512 27,951 3 19,738 3 8,213 15,185 3 12,766 3 28,307 19,834 8,473 15,650 12,657 in % in % in % 46.9 15.0 48.7 17.6 52.5 17.1 55.6 16.4 61.9 16.9 54.3 3 15.2 91.6 >500 not relevant 5 274.8 375.2 80.8 55.3 16.7 80.9 1,562 443 2,634 516 2,116 465 1,914 2,214 2,384 979 2,850 4,430 3 2,468 2,481 as % of sales 2.8 3.1 2.8 13.5 5.4 23.7 3 12.4 Dividend per ordinary share Dividend per preferred share Total dividends Payout ratio Share price, ordinary shares, at year-end Share price, preferred shares, at year-end Market capitalization at year-end in euros in euros 0.78 0.80 0.93 0.95 1.20 1.22 1.29 1.31 345 411 529 569 in % in euros in euros in bn euros 25.5 37.40 44.59 17.6 25.6 51.93 62.20 24.6 30.0 75.64 84.31 34.7 30.0 80.44 89.42 36.8 1.45 1.47 639 30.2 88.62 103.20 41.4 1.60 1.62 704 30.3 98.98 113.25 45.9 1.77 6 1.79 6 779 6 30.7 6 100.00 110.35 45.6 Employees Total 7 Germany Abroad (at December 31) 47,250 8,300 38,950 46,600 8,000 38,600 46,850 8,050 38,800 49,750 8,200 41,550 49,450 8,350 41,100 51,350 8,250 43,100 53,700 8,300 45,400 1 Application of IAS 8 “Accounting policies, changes in accounting estimates and errors” (see notes on pages 116 and 117 of the 2012 Annual Report). 2 Net income divided by sales. 3 Adjusted following final allocation of the purchase price for the acquisition of The Sun Products Corporation. 4 Net income divided by equity at the start of the year. 5 Figure not relevant due to the positive balance of net financial position and pension obligations. 6 Proposal to shareholders for the Annual General Meeting on April 9, 2018. 7 Basis: permanent employees excluding apprentices. 188 Quarterly breakdown of key financials189 Multi-year summary190 Index of tables and graphs193 Glossary195 Credits195 Contacts 190 Further information Henkel Annual Report 2017 Index of tables and graphs The Company Combined management report Highlights 2017 (inside cover) 1 Key financials 2 Sales by business unit 2017 3 Sales by region 2017 4 Key financials Adhesive Technologies 5 Sales Adhesive Technologies 6 Key financials Beauty Care 7 Sales Beauty Care 8 Key financials Laundry & Home Care 9 Sales Laundry & Home Care Shares and bonds 10 Key data on Henkel shares 2013 to 2017 11 Performance of Henkel shares versus market January through December 2017 12 Performance of Henkel shares versus market 2008 through 2017 13 Share data 14 ADR data 15 Shareholder structure: Institutional investors holding Henkel shares 16 Bond data 17 Analyst recommendations Corporate governance 18 Remuneration structure 19 Caps on remuneration 30 31 31 32 32 32 33 34 48 49 20 Remuneration of Management Board members who served in 2017 51 21 Structure of remuneration of Management Board members who served in 2017 22 Service cost / Present value of pension benefits 23 Pursuant to DCGK, payments / benefits granted for the reporting year to members of the Management Board serving in 2017 52 52 53 24 Pursuant to DCGK, remuneration / benefits paid for the reporting year to members of the Management Board serving in 2017 25 Supervisory Board remuneration 26 Shareholders’ Committee remuneration 54 56 57 Fundamental principles of the Group Operational activities 27 Henkel around the world: Regional Centers Henkel 2020+: Our ambition and strategic priorities 28 Financial ambition 2020 29 Acquisitions signed and closed in fiscal 2017 Cost of capital 30 WACC before tax by business unit 31 WACC after tax by business unit Economic report Macroeconomic development 32 Average rates of exchange versus the euro Results of operations of the Group 33 Sales development 34 Sales 35 Price and volume effects 36 Key financials by region 37 Adjusted operating profit (EBIT) 38 Reconciliation from sales to adjusted operating profit 39 Net income 61 62 64 64 66 67 67 67 68 68 69 70 40 Adjusted earnings per preferred share 70 41 Preferred share dividend 42 Guidance versus performance 2017 Adhesive Technologies 43 Key financials 44 Sales development 45 Sales Adhesive Technologies Beauty Care 46 Key financials 47 Sales development 48 Sales Beauty Care Laundry & Home Care 49 Key financials 50 Sales development 51 Sales Laundry & Home Care 70 71 72 72 73 74 74 75 76 76 77 Net assets and financial position 52 Capital expenditures by business unit 53 Capital expenditures 2017 54 Financial structure 55 Net financial position 2013–2017 59 56 Net financial position 57 Credit ratings 58 Key financial ratios Employees 59 Payroll cost and average headcount 60 Employees by organizational unit 61 Women in management 62 Employees by activity 63 Employees by age group 64 Employees Procurement 65 Material expenditures by business unit 66 Material expenditures by type Production 67 Number of production sites Research and development 68 R&D expenditures 69 R&D expenditures by business unit 70 Key R&D figures 71 Selected research and development sites Henkel AG & Co. KGaA (condensed version according to the German Commercial Code [HGB]) Results of operations 72 Condensed income statement in accordance with the German Commercial Code [HGB] Financial result 73 Condensed balance sheet in accordance with the German Commercial Code [HGB] Risks and opportunities report Risk management system 74 Overview of major risk categories 75 Classification of risks in ascending order 79 79 79 80 81 81 81 82 82 82 83 83 83 84 85 85 87 87 87 88 93 94 98 98 Henkel Annual Report 2017 Further information 191 Consolidated financial statements Notes to the consolidated statement of financial position 76 Consolidated statement of financial position – Assets 77 Consolidated statement of financial position – Equity and liabilities 78 Consolidated statement of income 79 Consolidated statement of comprehensive income 80 Consolidated statement of changes in equity 108 109 110 110 111 81 Consolidated statement of cash flows 112 82 Additional voluntary information: Reconciliation to free cash flow 83 Group segment report by business unit 84 Key financials by region 112 113 114 Accounting principles and methods applied in preparation of the consolidated financial statements Scope of consolidation 85 Scope of consolidation Acquisitions and divestments 86 Acquisitions 87 Reconciliation of the purchase price to provisional goodwill 115 117 117 Non-current assets 93 Useful life Intangible assets 94 Cost 95 Accumulated amortization / impairment 96 Net book values 97 Book values – Goodwill 98 Book values – Trademarks and other rights Property, plant and equipment 99 Cost 100 Accumulated depreciation / impairment 101 Net book values 102 Other financial assets 103 Other assets Inventories 104 Analysis of inventories Trade accounts receivable 105 Trade accounts receivable 106 Development of valuation allowances on trade accounts receivable 107 Assets and liabilities held for sale Currency translation 88 Currencies 119 108 Issued capital Recognition and measurement methods 89 Summary of selected measurement methods 120 Provisions for pensions and similar obligations 109 Actuarial assumptions New international accounting regulations according to International Financial Reporting Standards (IFRSs) 90 Accounting regulations applied for the first time in the year under review 122 91 Accounting regulations not applied in advance of their effective date 92 Accounting regulations not yet adopted into EU law 122 124 110 Development of defined benefit obligation at December 31, 2016 111 Development of plan assets at December 31, 2016 112 Development of asset ceiling at December 31, 2016 113 Development of the net obligation at December 31, 2016 114 Development of defined benefit obligation at December 31, 2017 115 Development of plan assets at December 31, 2017 116 Development of asset ceiling at December 31, 2017 117 Development of the net obligation at December 31, 2017 118 Analysis of reimbursement rights 119 Analysis of plan assets 120 Plan assets by country 2017 138 139 139 139 140 140 141 121 Classification of bonds by rating 2017 141 Risks associated with pension obligations 122 Future payments for pension benefits 142 123 Sensitivities – Present value of pension obligations at December 31, 2016 124 Sensitivities – Present value of pension obligations at December 31, 2017 Income tax provisions and other provisions 125 Development in 2017 126 Analysis of sundry provisions by function Borrowings 127 Borrowings 128 Bonds 129 Other financial liabilities 130 Other liabilities Financial instruments report 131 Financial instruments report 143 143 144 145 146 146 147 148 149 132 Carrying amounts and fair values of financial instruments (12/31/16) 151 133 Carrying amounts and fair values of financial instruments (12/31/17) 152 134 Net results of the measurement categories and reconciliation to financial result 135 Derivative financial instruments 136 Interest rates in percent p.a. 153 154 154 125 125 126 126 127 128 129 129 130 131 131 132 132 132 133 133 136 137 137 137 138 188 Quarterly breakdown of key financials189 Multi-year summary190 Index of tables and graphs193 Glossary195 Credits196 Contacts 192 Further information Henkel Annual Report 2017 Further information 169 Quarterly breakdown of key financials 188 170 Multi-year summary 189 Other disclosures 158 Reconciliation of adjusted net income Payroll cost and employee structure 159 Payroll cost 160 Number of employees per function Group segment report 161 Reconciliation between net operating assets / capital employed and financial statement figures 162 Earnings per share Consolidated statement of cash flows 163 Reconciliation of assets and liabilities reflected in cash flow from financing activities 164 Contingent liabilities Lease and other unrecognized financial commitments 165 Operating lease commitments 166 Finance lease commitments 2016 167 Finance lease commitments 2017 Auditor’s fees and services 168 Type of fee 167 167 167 170 171 172 173 173 173 173 175 137 Cash flow hedges (after income taxes) 155 138 Hedges of a net investment in a foreign entity (after income taxes) 139 Maximum risk position 140 Age analysis of non-impaired overdue loans and receivables 156 156 157 141 Financial assets and financial liabilities from derivatives subject to netting, collateral, or similar arrangements 157 142 Cash flows from financial liabilities at December 31, 2016 143 Cash flows from financial liabilities at December 31, 2017 144 Currency exposure 145 Interest rate exposure 146 Interest rate risk Notes to the consolidated statement of income 147 Other operating income 148 Other operating expenses Financial result 149 Financial result 150 Interest result 151 Other financial result Taxes on income 152 Income before tax and analysis of taxes 153 Main components of tax expense and income 154 Deferred tax expense by items on the statement of financial position 155 Tax reconciliation statement 156 Allocation of deferred taxes 157 Expiry dates of unused tax losses and tax credits 158 158 160 160 161 163 163 163 163 163 164 164 164 164 165 165 Henkel Annual Report 2017 Further information 193 188 Quarterly breakdown of key financials 189 Multi-year summary 190 Index of tables and graphs 193 Glossary 195 Credits 196 Contacts Glossary Adjusted EBIT Earnings Before Interest and Taxes (EBIT) adjusted for exceptional items in the form of one-time charges, one-time gains and restructuring expenses. Capital employed Capital invested in company assets and operations. Equity + interest-bearing liabilities. Compliance Acting in conformity with applicable regulations; ad herence to laws, rules, regulations and in-house or corporate codes of conduct. Compound annual growth rate Year-over-year rate of growth, e.g. of an investment. Corporate governance System of management and control, primarily within listed companies. Describes the powers and authority of corporate management, the extent to which these need to be monitored and the extent to which structures should be put in place through which certain interest / stakeholder groups may exert influence on the corporate management. Corporate Governance Code The German Corporate Governance Code (abbreviation: DCGK) is intended to render the rules governing corpo- rate management and control for a stock corporation in Germany transparent for national and international investors, engendering trust and confidence in the corporate management of German companies. Credit default swap Instrument used by Henkel to evaluate the credit risks of banks. Credit facility Aggregate of all loan services available on call from one or several banks as cover for an immediate credit requirement. Declaration of conformity Declaration made by the management / executive board and supervisory board of a company according to Section 161 German Stock Corporation Act [AktG], confirming implementation of the recommendations of the Governmental Commission for the German Corporate Governance Code. Defined contribution plans Post-employment benefit plans under which an entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in current and prior periods. Derivative Financial instrument, the value of which changes in res ponse to changes in an underlying asset or an index, which will be settled at a future date and which initially requires only a small or no investment. Earnings per share (EPS) Metric indicating the income of a joint stock corporation divided between the weighted average number of its shares outstanding. The calculation is performed in accordance with International Accounting Standard (IAS) 33. EBIT Abbreviation for Earnings Before Interest and Taxes. Standard profit metric that enables the earning power of the operating business activities of a company to be assessed independently of its financial structure, facilitating comparability between entities where these are financed by varying levels of debt capital. EBITDA Abbreviation for Earnings Before Interest, Taxes, Depreciation and Amortization. Economic Value Added (EVA®) The EVA concept reflects the net wealth generated by a company over a certain period. A company achieves pos- itive EVA when the operating result exceeds the weighted average cost of capital. The WACC corresponds to the yield on capital employed expected by the capital market. EVA is a registered trademark of Stern Stewart & Co. Equity ratio Financial metric indicating the ratio of equity to total capital. It expresses the share of total assets financed out of equity (owners’ capital) rather than debt capital (pro- vided by lenders). Serves to assess the financial stability and independence of a company. Free cash flow Cash flow actually available for acquisitions, dividend payments, the reduction of borrowings, and contribu- tions to pension funds. Gross margin Indicates the percentage by which a company’s sales exceed cost of sales, i.e. the ratio of gross profit to sales. Gross profit Difference between sales and cost of sales. Hedge accounting Method for accounting for hedging transactions where by the compensatory effect of changes in the fair value of the hedging instrument (derivative) and of the underlying asset or liability is recognized in either the statement of income or the statement of comprehensive income. 194 Further information Henkel Annual Report 2017 Return-enhancing portfolio Contains investments in equities and alternative invest- ments, and serves to improve the overall return of the pension plan assets over the long term in order to raise the coverage ratio of pension funds. In addition, a broader investment horizon increases the level of investment diversification. Return on capital employed (ROCE) Profitability metric reflecting the ratio of earnings before interest and taxes (EBIT) to capital employed. Return on sales (EBIT) Operating business metric derived from the ratio of EBIT to revenues. Also known as EBIT margin. Swap Term given to the exchange of capital amounts in differ- ing currencies (currency swap) or of different interest obligations (interest swap) between two entities. Value-at-risk Method, based on fair value, used to calculate the maxi- mum likely or potential future loss arising from a portfolio. Weighted average cost of capital (WACC) Average return on capital, expressed as a percentage and calculated on the basis of a weighted average of the cost of debt and equity. WACC represents the minimum return expected of a company by its lenders for financing its assets. KGaA Abbreviation for “Kommanditgesellschaft auf Aktien.” A KGaA is a company with a legal identity (legal entity) in which at least one partner has unlimited liability with respect to the company’s creditors (personally liable partner), while the liability for such debts of the other partners participating in the share-based capital stock is limited to their share capital (limited shareholders). Long-term incentive (LTI) Bonus aligned to long-term financial performance. Net financial position Net financial position is defined as cash and cash equiv- alents plus readily monetizable financial instruments classified as “availa ble for sale” or in the “fair value option,” less borrowings, and plus positive and less neg- ative fair values of hedging transactions. Net working capital Inventories plus payments on account, receivables from suppliers and trade accounts receivable, less trade accounts payable, liabilities to customers, and current sales provisions. Non-controlling interests Proportion of equity attributable to third parties in sub- sidiaries included within the scope of consolidation. Previously termed “minority interests.” Valued on a pro- portional net asset basis. A pro-rata portion of the net income of a corporation is due to shareholders owning non-controlling interests. Organic sales growth Growth in revenues after adjusting for effects arising from acquisitions, divestments and foreign exchange differences – i.e. “top line” growth generated from within. Payout ratio Indicates what percentage of annual net income (ad- justed for exceptional items) is paid out in dividends to shareholders, including non-controlling interests. Henkel Annual Report 2017 Further information 195 188 Quarterly breakdown of key financials 189 Multi-year summary 190 Index of tables and graphs 193 Glossary 195 Credits 196 Contacts Credits Published by Henkel AG & Co. KGaA 40191 Düsseldorf, Germany Phone: +49 (0) 211-797-0 © 2018 Henkel AG & Co. KGaA Edited by: Corporate Communications, Investor Relations, Corporate Accounting and Subsidiary Controlling Coordination: Dr. Hannes Schollenberger, Dr. Eva Sewing, Wolfgang Zengerling English translation: Donnelley Language Solutions, London Pre-print proofing: Paul Knighton, Cambridge; Thomas Krause, Krefeld Design and typesetting: MPM Corporate Communication Solutions, Mainz Photographs: Maya Claussen, Anne Großmann, Nils Hendrik Müller, Fergus Padel; Henkel Printed by: Druckpartner, Essen Date of publication of this Report: February 22, 2018 PR No.: 02 18 3,500 ISSN: 0724-4738 ISBN: 978-3-941517-73-8 The Annual Report is printed on LuxoArt Silk FSC. The paper is made from pulp bleached without chlorine. It has been certified and verified in accordance with the rules of the Forest Stewardship Council (FSC). The printing inks contain no heavy metals. This publication was cover-finished and bound with these Henkel products: Cellophaning with Aquence GA 6091 HGL laminating adhesive, bound using Technomelt PUR 3400 ME COOL and Technomelt GA 3960 Ultra for the highest occupational health and safety standards. Except as otherwise noted, all marks used in this publication are trademarks and / or registered trademarks of the Henkel Group in Germany and elsewhere. This document contains forward-looking statements which are based on the current estimates and assumptions made by the corporate management of Henkel AG & Co. KGaA. Forward-looking statements are characterized by the use of words such as expect, intend, plan, predict, assume, believe, estimate, anticipate, forecast and similar formulations. Such statements are not to be understood as in any way guaranteeing that those expectations will turn out to be accurate. Future performance and the results actually achieved by Henkel AG & Co. KGaA and its affiliated companies depend on a number of risks and uncertainties and may therefore differ materially from forward-looking state- ments. Many of these factors are outside Henkel’s control and cannot be accu- rately 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 forward-looking statements. This document has been issued for information purposes only and is not intended to constitute an investment advice or an offer to sell securities, or a solicitation of an offer to buy securities. 196 Further information Henkel Annual Report 2017 Contacts Corporate Communications Phone: +49 (0) 211-797-3533 Fax: +49 (0) 211-798-2484 E-mail: corporate.communications@henkel.com Investor Relations Phone: +49 (0) 211-797-3937 Fax: +49 (0) 211-798-2863 E-mail: investor.relations@henkel.com Our financial publications on the internet: www.henkel.com/reports Our sustainability publications on the internet: www.henkel.com/sustainability/reports Henkel app available for iOS and Android: Henkel in social media: www.facebook.com/henkel www.twitter.com/henkel www.linkedin.com/company/henkel_2 www.instagram.com/henkel www.youtube.com/henkel Financial calendar Annual General Meeting Henkel AG & Co. KGaA 2018: Monday, April 9, 2018 Publication of Statement for the First Quarter 2018: Wednesday, May 9, 2018 Publication of Report for the Second Quarter 2018 / Half Year 2018: Thursday, August 16, 2018 Publication of Statement for the Third Quarter 2018 / Nine Months 2018: Thursday, November 15, 2018 Publication of Report for Fiscal 2018: Thursday, February 21, 2019 Annual General Meeting Henkel AG & Co. KGaA 2019: Monday, April 8, 2019 Up-to-date facts and figures on Henkel also available on the internet: www.henkel.com 7 1 0 2 t r o p e R l a u n n A l e k n e H Henkel AG & Co. KGaA 40191 Düsseldorf, Germany Phone: +49 (0) 211-797-0 www.henkel.com