Annual Report 2013

Risks and opportunities report

Major risk categories

The risks are presented from a net perspective, where their respective risk mitigation measures are taken into account.

Major risk categories
Risk category Probability Potential financial impact
Operating risks
Procurement market risks Low Major
Production risks Moderate Moderate
Macroeconomic and sector-specific risks High Major
Functional risks
Financial risks
Credit risks Low Major
Liquidity risks Low Minor
Currency risks High Major
Interest rate risks Moderate Minor
Risks from pension obligations Low Major
Legal risks Low Major
IT risks  Low Major
Personnel risks High Minor
Risks in connection with our brand image
or reputation of the company 
Low Major
Environmental and safety risks Low Major
Business strategy risks Moderate Moderate

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Classification of risks in ascending order
Probability  
Low 1 – 9 %
Moderate 10 – 24 %
High ≥ 25 %
Potential financial impact  
Minor 1 – 49 million euros
Moderate 50 – 99 million euros
Major ≥ 100 million euros

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Operating risks

Procurement market risks
Description of risk: Moderate price increases in our procurement markets are expected in 2014. Due to geopolitical and global economic uncertainties, we expect prices to fluctuate throughout the course of the year. As a result of this uncertainty as it relates to the development of raw material prices that cannot always be passed on in full, we see additional risks arising beyond our guidance in relation to important raw materials and packaging which could impact our profitability. 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 sector. Additional price and supply risks exist due to possible demand or production-related shortages in the procurement markets. Continued unrest in the Africa/Middle East region, in particular, could lead to rising material prices and supply shortages.

Measures: The measures taken include active supplier portfolio management through our globally engaged, cross-divisional sourcing capability, together with strategies aimed at securing price and volume both through contracts and, where appropriate and possible, through financial hedging instruments. (Further information relating to the risks arising from derivativederivative
Financial instrument, the value of which changes in response 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.
financial instruments used for hedging purposes can be found in the notes to the consolidated financial statements.) Furthermore, we work in interdisciplinary teams within Research and Development, Supply ChainSupply Chain
Encompasses purchasing, production, storage, transport, customer services, requirements planning, production scheduling and supply chain management.
Management and Purchasing on devising alternative formulations and packaging forms so as to be able to respond flexibly to unforeseen fluctuations in raw material prices. We also avoid becoming dependent on individual suppliers so as to better secure the constant supply of the goods and services that we require. Finally, close collaboration with our strategic 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". The basis for our risk management approach is a comprehensive procurement information system that ensures permanent transparency with respect to our purchasing volumes.

Impact: Low probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, 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 volume decreases and unplanned operational interruptions, especially at our single-source sites.

Measures: We can offset the negative effects of possible 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 accordance with defined, differentiated responsibility procedures and approval processes. They incorporate all relevant specialist functions and are regulated in an internal corporate standard. Investments are analyzed in advance on the basis of detailed risk aspects. Further auditing accompanying projects provides the foundation for project management and risk reduction.

Impact: Moderate probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, possible moderate impact on our earnings guidance.

Macroeconomic and sector-specific risks
Description of risk: We remain exposed to macroeconomic risks emanating from the uncertainties of the current geopolitical and economic environment. A decline in the macroeconomic environment poses a risk to the industrial sector in particular. A downturn in consumer spending is especially relevant for the consumer segments. A prolonged debt and financial crisis would affect our markets in Southern Europe in particular. A further significant risk is posed by an increasingly competitive environment, as this could result in stronger price and promotional pressures in the consumer goods area. As consolidation in the retail sector continues and private labels occupy a growing share of the market, crowding-out competition in consumer goods could intensify. The risk of product substitution inherent in this could in principle affect all business units.

Measures: We focus on continuously strengthening our brands (see separate risk description here) and consistently developing further innovations. We consider innovative products as a significant success factor for our company, enabling us to differentiate ourselves from the competition. Furthermore, we also pursue specific sales and marketing initiatives, for example advertising and promotional activities. In addition, we have the capability to react quickly to potential sales declines through flexible production control.

Impact: High probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, 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, currency risks, interest rate risks, and risks arising from pension obligations.

For the description of our credit risks, liquidity risks, currency risks, and interest rate risks, please refer to the notes to the consolidated financial statements under note 21. For the risks arising from our pension obligations, please see Pension obligations.

Measures: Risk-mitigating measures and the management of these risks are also described in the notes to the consolidated financial statements on the pages mentioned.

Impact: We classify the 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 moderate probability of a minor impact on our earnings guidance
  •  

  • Risks arising from our pension obligations with a low probability of a major impact on our earnings guidance, but with a high probability of a major impact on our equity
  •  

Legal and regulatory risks
Description of risk: As a globally active corporation we are exposed, in the course of our ordinary business activities, to a range of risks relating to litigations 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 product liability, product deficiency, competition and cartel law, infringement of proprietary rights, patent law, tax law and environmental protection and soil contamination. We cannot rule out the likelihood of negative rulings on current litigations and further litigations being initiated in the future.

Our business is subject to various national rules and regulations as well as – within the European Union (EU) – increasingly harmonized pan-European laws. In addition, some of our operations are subject to rules and regulations derived from approvals, licenses, certificates or permits. Our manufacturing operations are bound by rules and regulations with respect to the registration, evaluation, usage, storage, transportation and handling of certain substances and also in relation to emissions, wastewater, effluent and other waste. The construction and operation of production facilities and other plant and equipment are governed by framework rules and regulations, including those relating to the decontamination of soil. Violation of such regulations may lead to legal proceedings or compromise our future business activities.

Measures: Our internal standards, guidelines, codes of conduct, and training measures are geared to ensuring compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
with statutory regulations and, for example, the safety of our manufacturing facilities and products. These requirements have also been incorporated into our management systems and are regularly audited. Ensuring compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
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 established a Group-wide compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
organization with locally and regionally responsible compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
officers led by a globally responsible General Counsel & Chief ComplianceCompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
Officer (for detailed information, see the corporate governance report). In addition, our corporate legal department maintains constant contact with local counsel. Current proceedings and potential risks are collected 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 are 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 litigation. Consequently, major losses may result from litigation and proceedings that are not covered by our insurance policies or provisions.

Impact: Low probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, possible major impact on our earnings guidance.

Supplementary information on selected proceedings:
Henkel is involved in litigations being brought by various antitrust authorities in Europe. These relate to infringements, some of which occurred more than ten years ago. Henkel has cooperated with the authorities in all such actions. On April 13, 2011, the European Commission imposed fines on a number of international laundry detergent manufacturers for reason of infringements that had occurred in various countries in Western Europe between 2002 and the beginning of 2005, which were discovered by Henkel in the course of internal compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
audits carried out in 2008. Henkel then immediately informed the relevant authorities and contributed materially to investigations into the matter. Due to our extensive cooperation with the EU Commission, Henkel was granted full immunity from fines.

On December 8, 2011, the French antitrust authorities imposed fines totaling around 360 million euros on several international detergent manufacturers on account of antitrust violations in France in the period from 1997 to 2004. Henkel received a fine of around 92 million euros. We have paid the amount and filed an action against the decision of the French antitrust authorities. In our opinion and that of our legal counsel, the French antitrust authorities' decision is not legally correct. We cooperated extensively with the relevant authorities throughout the entire proceedings and, on the basis of our own internal investigations, supplied important information that assisted in establishing the key facts of the matter in France. In addition, we were the first company to disclose the European dimension of the case. In our opinion, the case in France is directly related to the antitrust violations concerning heavy-duty detergents in various Western European countries – including France – that led to sanctions being imposed by the European Commission on April 13, 2011 and in respect of which we were granted full exemption from said sanctions. It would be contradictory if the French antitrust authorities were able to impose separate sanctions on us in respect of these infringements.

In addition to other retail companies and manufacturers, Henkel is involved in an antitrust litigation involving consumer goods (cosmetics and detergents) in Belgium relating to violations in the period from 2004 to the beginning of 2007. The action relates to a possible collusion between various Belgian retail companies to raise consumer prices (including prices for products in Henkel's portfolio) with the involvement of Henkel. Henkel has received a corresponding statement of objections. A conclusive assessment of the outcome of the litigation and amount of any fine that might be levied is not possible at present.

Information technology risks
Description of risk: Information technology has strategic significance for Henkel. Our business processes rely to a great extent on IT services, applications, networks, and infrastructure systems. The failure or disruption of critical IT services and the loss of confidential data constitute material risks for Henkel. The failure of computer networks or disruption of important IT applications can impair critical business processes. The loss of confidential data, for example formulations, customer data or price lists, could benefit Henkel's competitors. Henkel's reputation could also be damaged by such loss.

Measures: Henkel's information security strategy is based on the international standards ISO 27001 and 27002. Major components include the classification of information, business processes, IT applications, and IT infrastructure elements with respect to confidentiality, availability, integrity, and data protection requirements, as well as measures for avoiding risk.

Our critical business processes operate through redundantly configured systems designed for high availability. Our data backup procedures reflect state-of-the-art technology practice. We regularly review our restore and disaster-recovery processes. We develop our systems using proven project management and program modification procedures.

Access to buildings and areas containing IT systems, access to computer networks and applications, as well as user authorizations for our information systems, are strictly limited to the minimum level necessary. For critical business processes, the required segregation of duties is enforced by technological means.

Our networks are protected against unauthorized external access where economically viable. Operating systems and anti-virus software are automatically updated to their latest version on a continuous basis.

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 continuously reviewed by our Internal Audit function, other internal departments, and independent third parties.

Impact: Low probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, possible major impact on our earnings guidance.

Personnel risks
Description of risk: The motivation and the qualification of our employees are key drivers of Henkel's business success. Therefore, it is strategically important to recruit 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, and we are acutely aware of the effects of demographic change in many of our markets.

Measures: We combat the risk of losing valuable employees through specifically developed 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. We also provide a health management and consultation service on a global scale for our employees, aligned to their age and circumstances.

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 attractiveness as an employer is reinforced by our focus on promoting talent and specialized development programs.

Further information relating to our employees can be found here.

Impact: High probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, possible minor impact on our earnings guidance.

Risks in connection with our brand image or reputation of the company
Description of risk: As a globally operating corporation, Henkel is exposed to the potential damage of its image in the event of negative reports in the media – including social media – regarding Henkel's corporate 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 the statutory and regulatory risks (see here) and pro-active public relations management. The former ensures that our production facilities and products are safe. The latter reinforces our corporate brand and individual product brands. These measures are supported by a global communication network, and international and local crisis management systems with regular training sessions and crisis response planning.

Impact: Low probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, possible major impact on our sales and earnings guidance.

Environmental and safety risks
Description of risk: Henkel is a global manufacturing corporation and is therefore exposed to risks pertaining 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 damage may also be incurred.

Measures: We minimize these risks through the measures described under statutory and regulatory risks (see here), and through our auditing, advisory, and training activities. We update these preventive measures continuously in order to ensure that our facilities, assets, and reputation are properly safeguarded. We ensure compliancecompliance
Acting in conformity with applicable regulations; adherence to laws, rules, regulations and in-house or corporate codes of conduct.
with high technical standards and relevant statutory requirements as a further means of preserving our operational capability.

Impact: Low probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, possible major impact on our sales and earnings guidance.

Business strategy risks
Description of risk:
Business strategy risks can arise from the expectations we set for internal projects, acquisitions, and strategic alliances failing to materialize. The associated capital expenditures may not be recouped. Individual projects could also be delayed or even halted by unforeseen risks coming to light.

Measures: We combat these risks through comprehensive project management. We limit exposure through financial viability assessments in the review, decision, and implementation phase. These assessments are performed by specialist departments, supported by external consultants where appropriate. Project transparency and control are supported by our management systems.

Impact: Moderate probability ratingrating
Assessment of the creditworthiness of a company as published by rating agencies.
, possible moderate impact on our earnings guidance.