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 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. 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 2019, the key financial performance indicators for value-based management remained unchanged.

  • EBITDA margin (EBITDA in relation to sales). We compare historical performance with planned performance and 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 the four-quarter aggregate of noncurrent assets required for business operations. It is determined retroactively for the previous quarter. Investment income from Siltronic AG and the corresponding carrying amount in equity are not included when ROCE is calculated. ROCE is a clear indicator of how profitably the capital required for business operations is being employed.
  • EBITDA (earnings before interest, taxes, depreciation and amortization). This shows the company’s operational performance capability before considering 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 /amortization and impairments from EBITDA. The trend 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). Net cash flow shows whether we can finance ongoing operations and necessary investments with the funds generated by our own operating activities. WACKER’s aim is to generate a sustained positive . 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. Investments do not contain any right-of-use assets from lease accounting.
  • Net financial debt: defined 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 Groupwide Management Control

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

Development of Key Financial Performance Indicators in 2019

EBITDA margin: in 2019, the target margin was 20 percent. The Group actually achieved an EBITDA margin of 15.9 percent.

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Planned and Actual Figures

 

€ million

  

Reported for 2019

  

Forecast 2019

  

2018

 

  

 

  

 

  

 

EBITDA margin (%)

  

15.9

  

Clearly below prior-year level

  

18.7

EBITDA

  

783.4

  

10 to 20% lower than a year earlier

  

930.0

ROCE (%)

  

-11.3

  

Clearly below prior-year level

  

5.9

Net cash flow

  

184.4

  

Clearly positive and substantially higher than a year earlier

  

86.2

EBITDA: we expected EBITDA in 2019 to be 10 to 20 percent lower than a year earlier (without the insurance compensation for the incident-related damage incurred at Charleston). We missed this target. Adjusted for insurance compensation, EBITDA fell 28 percent year over year. This was mainly due to prices for solar-grade , which were lower than expected in 2019. The pre-tax cost of capital was 10.0 percent in 2019. We did not meet our BVC target at the Group level in 2019. BVC was influenced by an impairment of fixed assets. At €-1.1 billion, the figure achieved was worse than in the prior year.

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ROCE and BVC

 

  

 

  

 

€ million

  

2019

  

2018

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

  

-536.3

  

389.6

Capital employed1

  

5,183.5

  

4,917.0

ROCE2 (%)

  

-11.3

  

5.9

Pre-tax cost of capital (%)

  

10.0

  

10.3

BVC3

  

-1,102.4

  

-266.6

ROCE: WACKER’s ROCE in 2019 was -11.3 percent. In our March 2019 forecast, we had expected ROCE to be substantially below the prior-year level. It was much lower than expected, however, due to developments at WACKER POLYSILICON.

Net cash flow: our 2019 guidance was for a clearly positive figure, substantially higher than the year before. At €184.4 million, net cash flow was in line with our forecast. However, this was due to the insurance compensation received for the incident-related damage incurred at Charleston. Adjusted for this item, net cash flow in 2019 declined versus the previous year.

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.
Net Cash Flow
Net cash flow is the sum of cash flow from operating activities and cash flow from long-term investing activities (before securities).
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.
Net Cash Flow
Net cash flow is the sum of cash flow from operating activities and cash flow from long-term investing activities (before securities).
Polysilicon
Hyperpure polycrystalline silicon from WACKER POLYSILICON is used for manufacturing wafers for the electronics and solar industries. To produce it, metallurgical-grade silicon is converted into liquid trichlorosilane, highly distilled and deposited in hyperpure form at 1,000 °C.

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