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. 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 2020, 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 capital employed. ROCE is defined as earnings before interest and taxes (EBIT) 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 BVC 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 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. 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 2020

EBITDA margin: in 2020, the target margin was 20 percent. The Group actually achieved an EBITDA margin of 14.2 percent.

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Planned and Actual Figures

€ million	Reported for 2020	Forecast 2020	2019

EBITDA margin (%)	14.2	Somewhat lower than last year	15.9
EBITDA	666.3	About 20% lower than last year	783.4
ROCE (%)	5.6	Clearly positive, substantially higher than last year	-11.3
Net cash flow	697.7	Clearly positive, substantially higher than last year	184.4

EBITDA: we expected EBITDA to be some 20 percent lower in 2020 than a year earlier. The 14.9 percent contraction in EBITDA was in line with our expectations. The main reason for this drop was the special income of €112.5 million in insurance compensation we had booked in 2019. Adjusted for this income, the year-over-year decline in EBITDA was 0.7 percent. The pre-tax cost of capital was 10 percent in 2020. We reached our BVC target for the Group in 2020. At €-169 million, BVC was still negative but significantly better than in the prior year (2019: €-1.1 billion).

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ROCE and BVC

€ million

2020

2019

EBIT

262.8

-536.3

Capital employed¹

4,111.4

5,183.5

ROCE² (%)

5.6

-11.3

Pre-tax cost of capital (%)

-10.1

10.0

BVC³

-169.3

-1,102.4

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.

ROCE: WACKER’s ROCE in 2020 was 5.6 percent. In our March 2020 forecast, we had expected ROCE to be positive and substantially above the prior-year level.

Net cash flow: our 2020 guidance was for a clearly positive figure, substantially higher than the year before. At €697.7 million, net cash flow was much better than we had forecast. The reason for the improvement were lower investment spending and significant reductions in current assets.

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 ROCE is calculated. 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 defined as the sum of cash flow from operating activities and cash flow from long-term investing activities (excluding 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.