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 margin and . 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 are also important for management control. In addition to these indicators, 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 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 . is defined as earnings before interest and taxes () 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 depends mainly on changes in EBITDA.
  • Net cash flow (defined as the sum of 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.

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Planned and Actual Figures

 

€ million

 

Reported
for 2018

 

Forecast
2018

 

2017

 

 

 

 

 

 

 

EBITDA margin (%)

 

18.7

 

Slightly higher than last year

 

20.6

EBITDA

 

930.0

 

A mid-single-digit percentage increase

 

1,014.1

ROCE (%)

 

5.9

 

Substantially higher than last year

 

7.5

Net cash flow

 

124.7

 

Clearly positive, substantially below last year

 

358.1

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.

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ROCE and BVC

 

 

 

 

 

€ million

 

2018

 

2017

1

Capital employed is the sum of average noncurrent assets (less noncurrent securities and deferred tax assets), plus inventories and trade receivables (less trade payables). It is the variable used in calculating the cost of capital.

2

Return on capital employed is a ratio indicating how profitably capital is employed. Investment income from Siltronic AG and the corresponding carrying amount in equity are not included when ROCE is calculated.

3

BVC is calculated by adjusting EBIT for non-operational factors.

 

 

 

 

 

EBIT

 

389.6

 

423.7

Capital employed1

 

4,917.0

 

5,138.3

ROCE2 (%)

 

5.9

 

7.5

Pre-tax cost of capital (%)

 

10.3

 

10.1

BVC3

 

-266.6

 

-151.8

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.

EBITDA
Earnings before interest, taxes, depreciation and amortization.
Return on Capital Employed (ROCE)
Return on capital employed is the profitability ratio relating to the capital employed. It is defined as earnings before interest and taxes (EBIT) divided by capital employed. 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.
Cash Flow
Cash flow represents the movement of cash and cash equivalents into or out of a business activity during a finite period. Net cash flow is the sum of cash flow from operating activities (excluding changes in advance payments received) and cash flow from long-term investing activities (before securities), including additions due to finance leases.
Business Value Contribution (BVC)
BVC is a financial performance measurement that determines the value created by the WACKER Group and its units once all capital costs have been deducted. BVC is the difference between profit (EBIT) and cost of capital (WACC x CE). BVC is a profit variable that is adjusted to allow for extraordinary effects (e. g. sale of parts of the company). This makes it an ideal tool for measuring business performance.
EBITDA
Earnings before interest, taxes, depreciation and amortization.
Capital Employed (CE)
Capital employed is the sum of average noncurrent assets (less noncurrent securities and deferred tax assets), plus inventories and trade receivables (less trade payables). It is the variable used in calculating the cost of capital.
Return on Capital Employed (ROCE)
Return on capital employed is the profitability ratio relating to the capital employed. It is defined as earnings before interest and taxes (EBIT) divided by capital employed. 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.
EBIT
Earnings before interest and taxes: EBIT is a good indicator for comparing companies’ profitability, since it is widely used across the corporate world.
Business Value Contribution (BVC)
BVC is a financial performance measurement that determines the value created by the WACKER Group and its units once all capital costs have been deducted. BVC is the difference between profit (EBIT) and cost of capital (WACC x CE). BVC is a profit variable that is adjusted to allow for extraordinary effects (e. g. sale of parts of the company). This makes it an ideal tool for measuring business performance.
Cash Flow
Cash flow represents the movement of cash and cash equivalents into or out of a business activity during a finite period. Net cash flow is the sum of cash flow from operating activities (excluding changes in advance payments received) and cash flow from long-term investing activities (before securities), including additions due to finance leases.

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