Value-Based Management Is an Integral Part of Our Corporate Policies

Value-based management is an integral part of our corporate policies for sustainably increasing our company’s value in the long term. Under the EaGLE acronym (Eye at Growing a Longterm Enterprise), WACKER has been consolidating value-based management groupwide since 2002. Value management and strategic planning complement each other. Consequently, we coordinate the strategic positioning of a business entity and its contribution to boosting the company’s value. As part of annual planning, we make fundamental decisions on investments and innovation plans, on harnessing new markets and on a variety of other projects.

Key performance indicators support the management decision-making process. For example, lower-than-expected net cash flow could result in us adjusting investments during the year. Being highly flexible, WACKER can react to both positive and negative changes, as seen in the extension of the Tennessee project’s timeline. This decision relieves the pressure on our 2013 cash flow by an amount in the triple-digit million euro range.

Value Management Enhanced in 2012

As announced in 2011, we enhanced WACKER’s value management in 2012. In line with the capital markets’ assessment of WACKER, we no longer treat advance payments received as non-interest-bearing debt capital in capital employed, but as interest-bearing borrowed capital. As a result, capital employed and, hence the cost of capital, will rise considerably. At the same time, additions and disposals of advance payments received will no longer be recognized in net cash flow. Instead, these advance payments are regarded as financial liabilities and, thus, have changed our target capital structure from the previous 90 percent equity to 80 percent equity and 20 percent borrowed capital.

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Cost of Capital

 

 

 

 

 

 

 

2012

 

2011

 

 

 

 

 

Riskless interest rate (%)

 

3.0

 

3.8

Market premium (%)

 

4.5

 

4.2

Beta coefficient

 

1.5

 

1.5

Post-tax cost of equity (%)

 

9.75

 

10.1

 

 

 

 

 

Tax rate (%)

 

30.0

 

30.0

Pre-tax cost of equity (%)

 

13.9

 

14.4

Pre-tax borrowing costs (%)

 

5.0

 

5.0

Tax shield (30%)

 

1.5

 

1.5

Post-tax borrowing costs (%)

 

3.5

 

3.5

 

 

 

 

 

Share of equity (%)

 

80.0

 

90.0

Share of borrowed capital (%)

 

20.0

 

10.0

Post-tax cost of capital (%)

 

8.5

 

9.5

Pre-tax cost of capital (%)

 

12.1

 

13.6

ROCE Added to Our Key Performance Indicators

In 2012, we added ROCE (Return on Capital Employed) to our key performance indicators for value management. By doing so, our management decisions will be more sharply focused on capital intensity. WACKER’s operations are capital-intensive, Our investments can account for up to 25 percent of revenues. WACKER has a total of four key performance indicators: BVC (Business Value Contribution), EBITDA (earnings before interest, taxes, depreciation and amortization), net cash flow (NCF – defined as the sum of cash flow from operating activities and noncurrent investment activities, before securities, including additions from finance leases less the change in advance payments received) and ROCE.

We call earnings after cost of capital our business value contribution (BVC). Investors expect a minimum rate of return on fixed and current assets that covers the cost of capital. The aim of BVC is for WACKER to generate a residual profit that is above the cost of capital, thereby creating value within the company. The pre-tax cost of capital employed dropped in 2012. There were two reasons for this:

First, the low interest rates currently seen on international capital markets – which result in a historically low rate of return on so-called risk-free investments.

Second, the change in our target capital structure. Since advance payments received are treated as borrowed capital, the borrowing level was increased to benefit from a more efficient capital structure.

In 2012, the cost of capital was 12 percent. Every year, we review the cost of capital at each business division and determine specific risk premiums (beta coefficient). To calculate the BVC, the cost of capital and non-operational factors are deducted from EBIT. Every division is set a BVC target that is calculated during the planning stage. This target is combined at the Group level into one value.

BVC

In 2012, we did not meet our BVC target. At €-366 million, the actual BVC was clearly negative. Marked polysilicon-price declines and persistent silicon-wafer price pressure were the main reasons for a negative BVC at the Group level.

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Planned and Actual Figures

 

 

 

 

 

 

 

€ million

 

2011

 

Goals for 2012

 

Actual Figure:
2012

 

 

 

 

 

 

 

BVC

 

183.5

 

-205.0

 

-366.0

EBITDA margin (%)

 

22.5

 

19.0

 

17.0

Net cash flow

 

-157.4

 

-310.0

 

-536.2

ROCE

 

13.9

 

8.9

 

5.2

EBITDA

WACKER’s second target is high profitability compared to the competition. The benchmark here is EBITDA. Each division is compared with its most profitable competitor. Using this comparison, and historical performance and divisional planning, we calculate the divisions’ target EBITDA margins. For the Group, we take the weighted divisional average as our target margin. In 2012, 19 percent had been planned, with the Group actually posting an EBITDA margin of 17.0 percent.

Net Cash Flow

The third goal is net cash flow. On average, we strive for a slightly positive NCF value, depending on our earnings situation and investment plans in a particular year. In 2012, due to our high investment level, we were planning for net cash flow in clearly negative territory. It came in below 2012’s targets at minus €536.2 million.

ROCE

WACKER achieved ROCE of 5.2 percent in 2012, due to the increase in tied-up funds and to weaker profitability. ROCE is reviewed yearly as part of our planning process and is a key criterion for managing our investment budget.

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ROCE and BVC

 

 

 

 

 

€ million

 

2012

 

2011

1

Capital employed is made up of average noncurrent fixed assets (less noncurrent securities), inventories, and trade receivables less trade payables. It is a variable used in calculating the cost of capital.

2

Return on capital employed is the profitability ratio relating to the capital employed.

 

 

 

 

 

EBIT

 

258.0

 

603.2

Capital employed1

 

4,979

 

4,342.8

ROCE2 (%)

 

5.2

 

13.9

Pre-tax cost of capital (%)

 

12.1

 

13.6

BVC

 

-366.0

 

183.5

To continually increase the company’s value, we tie the variable compensation of senior managers at our divisions and corporate departments to the following performance indicators: BVC, EBITDA margin, development of net cash flow and ROCE.