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®) to assess growth to date and to appraise future plans. 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 statement of financial position. A reconciliation of the year-end figures in that financial statement to the average values used in determining capital employed can be found of our annual report 2011.
The cost of capital employed is calculated as a weighted average of the cost of capital (WACC) comprising both equity and debt. In fiscal 2011 we applied a WACC after tax of 6.5 percent. Before tax, the figure was 9.0 percent. We regularly review our cost of capital in order to reflect changing market conditions. Starting fiscal 2012, therefore, we have adopted a WACC of 9.5 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 2011, this resulted in a WACC before tax of 9.0 percent (6.5 percent after tax) for both Laundry & Home Care and Cosmetics/ Toiletries, and of 10.5 percent before tax (7.5 percent after tax) for Adhesive Technologies. In 2012 we are applying a WACC of 9.5 percent before tax (6.5 percent after tax) for the business sectors Laundry & Home Care and Cosmetics/Toiletries, and 11.5 percent before tax (8.0 percent after tax) for Adhesive Technologies.
Weighted average cost of capital (WACC)
|
|
2011 |
from 2012 |
| Risk-free interest rate |
4.8 % |
3.5 % |
| Market risk premium |
4.5 % |
4.5 % |
| Beta factor |
0.8 |
0.8 |
| Cost of equity after tax |
6.8% |
7.1% |
|
|
| |
| Cost of debt capital before tax |
4.1 % |
4.7 % |
| Tax shield (30 %) |
–1.2 % |
–1.4 % |
| Cost of debt capital after tax |
2.9 % |
3.3 % |
|
|
| |
| Share of equity 1) (peer group structure) |
85 % |
85 % |
| Share of debt capital 1) (peer group structure) |
15 % |
15 % |
|
|
| |
| WACC after tax 2) |
6.5 % |
6.5 % |
| Tax rate |
30 % |
30 % |
| WACC before tax 2) |
9.0 % |
9.5 % |
WACC before tax by business sector
|
|
2011 |
from 2012 |
| Laundry & Home Care |
9.0 % |
9.5 % |
| Cosmetics/Toiletries |
9.0 % |
9.5 % |
| Adhesive Technologies |
10.5 % |
11.5 % |
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® = EBIT3) – (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 = EBIT3) ÷ 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 2011, the Henkel Group posted positive economic value added (EVA®) amounting to 848 million euros, an increase of 279 million euros (+49.0 percent) above the prior-year figure. This is attributable to both the very strong rise in operating profit and a decrease in capital employed. All our business sectors posted a positive EVA®. At Laundry & Home Care, the figure was 303 million euros, 5.7 percent above the prior-year level, resulting from a very strong reduction in capital employed. Cosmetics/Toiletries generated EVA® of 290 million euros, a major plus of 40.6 percent versus 2010 achieved thanks to a substantial increase in operating profit. At Adhesive Technologies, we increased our EVA® to 282 million euros, a rise of 209 million euros, due both to the significant improvement in operating profit and a reduction in capital employed compared to the previous year.
ROCE increased from 14.9 percent to 16.6 percent. This is essentially due to the very strong development in operating profit and a reduction in the level of capital employed.
EVA® and ROCE 4)
| in million euros |
Laundry & Home Care |
Cosmetics/ |
Adhesive Technologies |
Henkel |
| EBIT 3) |
511 |
471 |
1,002 |
1,857 |
|
Capital employed |
2,314 |
2,001 |
6,853 |
11,208 |
|
Cost of capital 5) |
208 |
180 |
720 |
1,009 6) |
|
EVA® 2011 |
303 |
290 |
282 |
848 6) |
|
EVA® 2010 |
286 |
207 |
73 |
569 7) |
|
ROCE 2011 |
22.1 % |
23.5 % |
14.6 % |
16.6 % |
|
ROCE 2010 |
21.2 % |
20.1 % |
12.5 % |
14.9 % |
1) At market values.
2) Rounded.
3) Adjusted for goodwill impairment losses.
4) Calculated on the basis of units of 1,000 euros.
5) Calculated on the basis of the different sector-specific WACC rates applied.
6) Calculated on the basis of a WACC rate of 9.0 percent for the Henkel Group.
7) Calculated on the basis of a WACC rate of 10.0 percent for the Henkel Group.
EVA® is a registered trademark of Stern Stewart & Co.
