Value-based management
We aim to systematically and continuously increase the value of the company through profitable growth and a focus on businesses with the best development opportunities. For this we use a value-based management system. Key elements of this management system are integrated controlling, value-based performance indicators, and value-increasing measures.
- Integrated controlling secures Groupwide transparency
- ThyssenKrupp Value Added as a value-based performance indicator
- Increasing value through growth, efficiency, capital employed
- Value-added impacted by impairment charges
- Further development of value-based management
Integrated controlling secures Groupwide transparency
We use an integrated controlling system to manage the activities of all areas of the Group. It helps us identify and bridge operational and strategic gaps between actual and target performance. Our high-quality reporting and forecasting systems connect strategic and operational elements in real time. The performance indicators are also used to calculate the variable components of management compensation.
ThyssenKrupp Value Added as a value-based performance indicator
The central performance indicator for our value-based management system is ThyssenKrupp Value Added (TKVA), which measures the value created in a period at all levels of the Group. It is calculated as earnings before interest and taxes (EBIT) minus cost of capital. Cost of capital represents the expected return on equity and debt. The weighted average cost of capital (WACC) is calculated on a pre-tax basis and is made up of the weighted average cost of equity and debt as well as the interest rate for pension provisions. Capital employed is defined as invested assets plus net working capital; it is the amount of capital tied up in operations.
Increasing value through growth, efficiency, capital employed
TKVA can be increased using three levers: profitable growth, higher operating efficiency, and optimized capital employed. A major contribution to profitable growth and thus to the value of the company is made by investment projects that generate returns higher than their cost of capital. Higher operating efficiency and optimum capital employed are also aims of the new impact program. With it we will increase EBIT, reduce net working capital and so sustainably improve TKVA.
The results of the analysis of the performance indicators feed directly into portfolio management. Group management decides which businesses are to be expanded to realize set TKVA targets, and which activities we should withdraw from in a timely way to protect value.
Value-added impacted by impairment charges
In calculating TKVA we applied the new definitions of EBIT and capital employed for the first time from 2010/2011 and adjusted the prior-year figures.
In the past fiscal year ThyssenKrupp generated highly negative value-added of €(2,962) million. This was caused by the high impairment charges in the Steel Americas and Stainless Global business areas, which weighed heavily on EBIT of the ThyssenKrupp Group. In addition, average capital employed increased yearon- year by €2,456 million in 2010/2011, mainly due to the major investments in the Steel Americas and Stainless Global business areas. The value-added figures of the other six business areas were strongly positive and in most business areas were considerably up from the prior year, mainly due to higher earnings. Details on the value-added ratios are shown in the table below.
The TKVA of Stainless Global in 2010/2011 includes an impairment charge of €510 million in accordance with IFRS 5. The TKVA of Materials Services in 2010/2011 includes an impairment charge of €48 million in accordance with IFRS 5.
Further development of value-based management
In fiscal year 2010/2011 ThyssenKrupp switched its operational management from EBT to EBIT. EBIT is a key parameter affecting TKVA, so we now manage the Group based more closely on the performance factors that can be influenced by operational management. In addition, operational management and value management are now optimally interlinked.
In connection with the introduction of EBIT-based management we modified the definitions of EBIT and capital employed, altering the classification of financial income/expense into operational and nonoperational components. EBIT contains only components of financial income/expense that are operational in nature. Interest income, interest expense and the great majority of other financial income/expense are nonoperational in character. These modifications also apply at business area level and take into account the fact that the receipt of advance payments, particularly in the business areas with long-term construction contracts, is an integral part of risk management – to avoid default risks on the customer side – and thus of operating business. To recognize these advance payments, and the interest and financing effects attainable with them, in our value management, the EBIT of the relevant business areas is increased by an imputed earnings contribution.
Source: Annual Report 2010/2011, pages 54-55
