Performance Measurement
Value-based management and control system
We align our corporate management and control activities to the overall objective of achieving a sustainable increase in shareholder value. To make achievement of our growth targets measurable, we have adopted a modern system of metrics with which we calculate value-added and return ratios in line with capital market practice.
We use economic value added (EVA®)1) to assess growth to date and to appraise future plans. All our operating and strategic decisions are examined for sustainable economic value added. EVA® is a measure of the surplus financial value generated by a company over a certain period. A company creates economic value added if its operating profit exceeds its cost of capital, the latter being defined as the return on capital expected by the capital market.
Operational business performance is measured on the basis of operating profit (EBIT adjusted for any goodwill impairment losses). The capital employed figure is calculated from the assets side of the balance sheet.
The cost of capital employed is calculated as a weighted average of the cost of capital (WACC) comprising both equity and debt. In fiscal 2010 we applied a WACC after tax of 7.0 percent. Before tax, the figure was 10.0 percent. We regularly review our cost of capital in order to reflect changing market conditions. Starting fiscal 2011, therefore, we have adopted a WACC of 9.0 percent before tax and 6.5 percent after tax.
We further apply different WACC rates depending on the business sector involved. This is based on sector-specific beta factors taken from a peer group benchmark. In fiscal 2010, this resulted in a WACC before tax of 10.0 percent (7.0 percent after tax) for both Laundry & Home Care and Cosmetics/Toiletries, and of 11.5 percent before tax (8.0 percent after tax) for Adhesive Technologies. In 2011 we are applying a WACC of 9.0 percent before tax (6.5 percent after tax) for the business sectors Laundry & Home Care and Cosmetics/Toiletries, and 10.5 percent before tax (7.5 percent after tax) for Adhesive Technologies.
Weighted average cost of capital (WACC)
|
|
2010 |
from 2011 |
| Risk-free interest rate |
4.8 % |
3.3 % |
| Market risk premium |
4.5 % |
4.5 % |
| Beta factor |
0.8 |
0.8 |
| Cost of equity after tax |
8.0% |
6.8% |
|
|
| |
| Cost of debt capital before tax |
5.0 % |
4.1 % |
| Tax shield (30 %) |
–1.5 % |
–1.2 % |
| Cost of debt capital after tax |
3.5 % |
2.9 % |
|
|
| |
| Share of equity 1) (peer group structure) 2) |
75 % |
85 % |
| Share of debt capital 1) (peer group structure) 2) |
25 % |
15 % |
|
|
| |
| WACC after tax 3) |
7.0 % |
6.5 % |
| Tax rate |
30 % |
30 % |
| WACC before tax 3) |
10.0 % |
9.0 % |
WACC before tax by business sector
|
|
2010 |
from 2011 |
| Laundry & Home Care |
10.0 % |
9.0 % |
| Cosmetics/Toiletries |
10.0 % |
9.0 % |
| Adhesive Technologies |
11.5 % |
10.5 % |
EVA® and ROCE
EVA® serves to promote value-added decisions and profitable growth in all our business sectors. Operations exhibiting negative value contributions with no prospect of positive EVA® in the future are divested or otherwise discontinued.
At Henkel, EVA® is calculated as follows:
EVA® = EBIT 4) – (Capital Employed x WACC).
In order to be better able to compare business units of varying size, we additionally apply return on capital employed, calculated as follows:
ROCE = EBIT 4) ÷ Capital Employed.
ROCE represents the return on average capital employed. We create value where this metric exceeds the cost of capital before tax.
In fiscal 2010, the Henkel Group posted positive economic value added (EVA®) amounting to 569 million euros, an increase of 770 million euros over the prior-year figure, attributable primarily to the significant increase in operating profits. All our business sectors achieved a positive EVA®. In the case of Laundry & Home Care, the figure came in at 286 million euros, a substantial 23.5 percent above the prior-year level; with 207 million euros, Cosmetics/Toiletries likewise posted an appreciable improvement of 25.8 percent. And the Adhesive Technologies business sector was also able to generate positive EVA® at 73 million euros following a negative 543 million euros in fiscal 2009, due primarily to significant restructuring expenses and one-time charges.
ROCE increased considerably, from 9.8 percent to 14.9 percent. This is essentially due to the highly positive development in operating profit and a virtually unchanged level of capital employed.
EVA® and ROCE 5)
| in million euros |
Laundry & Home Care |
Cosmetics/ |
Adhesive Technologies |
Henkel |
| EBIT |
542 |
411 |
884 9) |
1,729 9) |
|
Capital employed |
2,558 |
2,041 |
7,049 |
11,595 |
|
Cost of capital 6) |
256 |
204 |
811 |
1,160 8) |
|
EVA® 2010 |
286 |
207 |
73 |
569 8) |
|
EVA® 2009 |
232 |
164 |
- 543 |
- 201 7) |
|
ROCE 2010 |
21.2 % |
20.1 % |
12.5 % |
14.9 % |
|
ROCE 2009 |
19.6 % |
18.2 % |
4.8 % |
9.8 % |
1) At market values.
2) Previous year: Target structure.
3) Rounded.
4) Adjusted for goodwill impairment losses.
5) Calculated on the basis of units of 1,000 euros.
6) Calculated on the basis of the different sector-specific WACC rates applied.
7) Calculated on the basis of a WACC rate of 11.5 percent for the Henkel Group.
8) Calculated on the basis of a WACC rate of 10.0 percent for the Henkel Group.
9) EBIT adjusted for 6 million euros attributable to goodwill impairment losses.
EVA® is a registered trademark of Stern Stewart & Co.
