Value-Based Management Is Integral to Our Corporate Policies

Value-based management is an integral part of our corporate policies. Its purpose is to achieve a lasting increase in our company’s value. In our management processes, we distinguish between performance parameters 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. Budget parameters such as EBITDA and net cash flow are also important for management control. 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.

Value management and strategic planning complement each other, which is why we align the strategic positioning of a business entity with its contribution to increasing the company’s value. As part of our annual planning process, we make fundamental decisions on capital expenditures and innovation projects, on tapping new markets and on a variety of other projects.

Active use is made of key financial performance indicators in the management decision-making process. For example, lower-than-expected net cash flow could prompt us to adjust our capital expenditure during the year. WACKER is very flexible at responding 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 2018, 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 as well as with that of the competition, and use the results 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 working capital as well as noncurrent assets required for business operations. Investment income from Siltronic AG and the corresponding carrying amount in equity are not included when calculating ROCE. ROCE is a clear indicator of how profitably the capital required for business operations is being employed. It is influenced not only by profitability, but also by capital intensity with regard to noncurrent assets required for business operations and to working capital. 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 taking into consideration the 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 depends mainly on changes in EBITDA.
• 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 on its 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.

Capital expenditures: in the course of our medium-term planning, we set capital-expenditure priorities and an investment budget. Other capital expenditures are planned by each business division. To this end, the individual business divisions regularly analyze their capacity utilization and anticipated capacity requirements. The respective business divisions and Corporate Engineering are responsible for the operational management of individual investment projects (project handling, deadlines, budgets, quality and safety).

Net financial debt: WACKER’s net financial debt is a supplementary performance indicator used to monitor the Group’s financial situation. We define it as the sum of cash and cash equivalents, noncurrent and current securities, and noncurrent and current financial liabilities.

Non-Financial Performance Indicators Are Not Intended for Corporate Management

None of the non-financial performance indicators we employ is used universally for corporate decision-making.

Development of Key Financial Performance Indicators in 2018

EBITDA margin: in 2018, the target margin was 20 percent. The Group’s actual EBITDA margin was 18.7 percent.

EBITDA: we expected EBITDA to increase by a mid-single-digit percentage in 2018 compared with the previous year. We missed this target, the reason being that we did not receive the insurance compensation for the loss event at the Charleston site in Tennessee (USA) in the course of the year. EBITDA declined by €84.1 million year over year to €930.0 million. In 2018, the cost of capital before taxes was 10.3 percent. We did not meet our BVC target at the Group level in 2018. At €-266.6 million, the figure achieved was worse than in the prior year.

ROCE: WACKER’s ROCE in 2018 was 5.9 percent. In our March 2018 forecast, we had expected ROCE to be substantially above the prior-year level. The still unpaid insurance compensation prevented us from reaching this target.

Net cash flow: our projection for 2018 was that net cash flow would be clearly positive, but substantially below the previous year’s figure. At €124.7 million, net cash flow was in line with our forecast.