Value-based management is an integral part of our corporate policy of sustainably increasing our company’s value in the long term. In our management processes, we distinguish between performance and budget parameters. Performance parameters serve the financial management of the company. They include the EBITDA margin and ROCE. The EBITDA margin indicates how successful the company is compared with the competition, while ROCE shows how efficiently the company employs its capital. Also important for management control are the budget parameters EBITDA and net cash flow. In addition to these indicators, BVC (Business Value Contribution) is a dedicated budget parameter used in the calculation of variable compensation for Executive Board members and senior managers.

In this context, value management and strategic planning complement each other. We accordingly align the strategic positioning of a business entity with its contribution to increasing the company’s value. As part of annual planning, we make fundamental decisions on capital expenditure and innovation projects, on harnessing new markets and on a variety of other projects.

The management decision-making process makes active use of key financial performance indicators. For example, lower-than-expected net cash flow could result in our adjusting investments during the year. Being highly flexible, WACKER can react to both positive and negative changes.

The EBITDA trend is considered to be the most important financial indicator for communication with capital markets.

Key Financial Performance Indicators for the WACKER Group

In 2015, we continued to use the same key financial performance indicators for value management as in previous years. These are:

• EBITDA margin (EBITDA in relation to sales). We compare historical performance with planned performance and with the competition, and use the result to calculate a target EBITDA margin. We calculate the weighted divisional average as our target margin for the Group.
• ROCE or return on capital employed. ROCE is defined as earnings before interest and taxes (EBIT) divided by capital employed. Capital employed comprises noncurrent assets and net current assets. ROCE clearly indicates how profitably the capital required for business operations is being employed. ROCE is influenced not only by profitability, but also by capital intensity with regard to noncurrent and net current assets. ROCE is reviewed annually as part of our planning process and is a key criterion for managing our capital expenditure budget.
• EBITDA (earnings before interest, taxes, depreciation and amortization). This demonstrates the operational performance capability of the company before cost of capital. We set absolute EBITDA targets for the business divisions and take the cost of capital into account by using BVC to determine the internal budget target. We calculate BVC by deducting the cost of capital, non-operational factors, and depreciation and amortization from EBITDA. The development of BVC is related mainly to changes in EBITDA. Changes in the cost of capital have only a marginal effect on BVC.
• Net cash flow (defined as the sum of cash flow from operating activities and long-term investing activities before securities and including additions from finance leases, less the change in advance payments received). Net cash flow shows whether we can finance ongoing operations and necessary investments from our own operating activities. WACKER’s aim is to generate a sustained positive net cash flow. Apart from profitability, the main factors affecting net cash flow are the effective management of net current assets and the level of capital expenditures.

Supplementary Financial Performance Indicators

Our key financial performance indicators are supplemented by additional performance indicators that provide us with information on the Group’s sales and liquidity situation and debt levels.

These supplementary financial performance indicators include:

• Sales. Profitable growth is an important factor in increasing the company’s value over the long term and one of the main drivers of a positive cash flow trend.
• Investments. As our business is capital intensive, managing capital expenditures is of crucial importance. As part of our medium-term planning, we set capital expenditure priorities and an investment budget. Investments of overriding importance for the company are decided on by the Executive Board on the basis of the Group’s strategy. Other investments are planned by the individual divisions. The focus here is generally on expansion projects with a low specific level of investment and projects targeting the expansion of capacity for downstream products that add value. To this end, the individual business divisions regularly analyze their capacity utilization and anticipated capacity requirements. Both these factors are essential in determining capital expenditure requirements. The respective business divisions and Corporate Engineering at WACKER are responsible for the operational management of the individual investment projects (i.e. for handling, deadlines, budgets, quality, safety). Both current and planned capital expenditures are managed flexibly and aligned with market trends, enabling us to make ad hoc adjustments to our investment budget throughout the year. To this end, all capital-expenditure projects are regularly consolidated and analyzed at the Group level.
• Net financial debt. Net financial debt is a supplementary performance indicator that we use to monitor WACKER’s financial situation. We define it as the sum of cash and cash equivalents, noncurrent and current securities, and noncurrent and current financial liabilities. Net financial debt is also an important factor in our financing activities. The financing agreements concluded by WACKER contain standard market credit terms and a net debt-to-EBITDA ratio as the only financial covenant. By monitoring and managing our net financial debt, we ensure that it remains within the limits set by the net debit-to-EBITDA financial covenant ratio agreed with our creditors.

Non-Financial Performance Indicators

None of the non-financial performance indicators described in detail in the Annual Report are used universally for corporate decision-making, although certain indicators, such as the accident rate, are important in some parts of the company. The following table shows which non-financial performance indicators are used in individual parts of the company.

Non-Financial Performance Indicators Used for Decision-Making in Parts of the Company

Development of Key Financial Performance Indicators in 2015

EBITDA margin: In 2015, the target margin was 20 percent, with the Group posting an actual EBITDA margin of 19.8 percent.

ROCE: WACKER’s ROCE in 2015 was 8.1 percent. In our forecast, we had assumed that ROCE would be lower than in the prior year due to the increase in capital employed.

EBITDA: We were expecting EBITDA – adjusted for special income – to be marginally higher in 2015 compared with the prior year, and we achieved this target. Compared with the prior year, EBITDA exclusive of special income rose by € 75.2 million to € 911.2 million. EBITDA inclusive of special income rose by a slight € 6.5 million from € 1,042.3 million to € 1,048.8 million. In 2015, the cost of capital before taxes was 10.4 percent. Although we did not meet our BVC target at the Group level in 2015, the actual amount at € –119.1 million was on a par with the prior year.

Net cash flow: Given our high level of investment spending, we projected a slightly positive net cash flow for 2015. At € 22.5 million, net cash flow was in line with our forecast.

Planned and Actual Figures

ROCE and BVC