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, innovation plans, new markets and a variety of other projects.

Key Performance Indicators

WACKER’s key performance indicators for value management are: BVC (business value contribution), EBITDA (earnings before interest, taxes, depreciation and amortization), and net cash flow.

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 pre-tax cost of capital employed remained at 13.6 percent in 2011. 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. Every year, we review each business division’s cost of capital and calculate risk premiums (the beta factor) specific to an individual division. To calculate the BVC, the cost of capital and non-operational factors are deducted from EBIT. Annually, 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.

In 2011, we did not fully meet our BVC target, even though it was clearly positive at €183.5 million. Our BVC was particularly impacted by the following: lower polysilicon prices during Q4 2011, Siltronic’s lower capacity utilization, and the expenditures associated with the planned closure of Siltronic’s Hikari site.

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 a target EBITDA margin. This is defined as a weighted divisional average. In 2011, the target was 25 percent. In 2011, we reached a Group EBITDA margin of 22.5 percent.

Our third target is 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). On average, we strive for a slightly positive value here. From year to year, this depends on our earnings situation and planned investments. The goal for 2011 was a slightly positive net cash flow. This was reduced by the level of earnings, which was slightly lower than expected, and by the faster pace of investment activities. Higher advance payments by customers relating to polysilicon agreements had a positive impact on net cash flow. At €6.2 million, net cash flow was on target.

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

ROCE Clearly Surpasses Cost of Capital

Rather than the originally projected ROCE (return on capital employed) of 19.7 percent, we actually achieved a ROCE of 18.1 percent in 2011. As in the prior year, a considerable premium on our cost of capital was therefore earned. ROCE is reviewed yearly as part of our planning process and is a key criterion for managing our investment budget.

Value Management to Be Enhanced in 2012

WACKER is to enhance its value management in 2012. In line with the capital markets’ assessment of WACKER, we will 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 from polysilicon agreements will no longer be recognized in net cash flow. These advance payments received will instead be regarded as financial liabilities and thus change our target capital structure from the previous 90 percent equity to 80 percent equity and 20 percent borrowed capital. In relation to 2011, the new approach would have produced the following changes to the figures reported: the capital employed would have totaled €4,516 million, with ROCE at 13.3 percent. The net cash flow would have dropped by €163.6 million to €-157.4 million.

We are checking whether, in 2012, the previous financial performance measurements BVC, NCF and EBITDA margin can be supplemented by the return on capital employed (ROCE). Each year, BVC and NCF are defined at the planning stage. The target EBITDA margin is calculated separately, just as is the case with ROCE. As a second financial performance measurement that is independent of the planning stage, ROCE is intended to represent the company’s long-term performance.