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. 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 goodwillAmount by which the total consideration for a company or a business exceeds the netted sum of the fair values of the individual, identifiable assets and liabilities.
impairment losses. The capital employedInterest-bearing capital invested in company assets and operations.
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 employedInterest-bearing capital invested in company assets and operations.
can be found here.

The cost of capital employedInterest-bearing capital invested in company assets and operations.
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.

1 EVA® is a registered trademark of Stern Stewart & Co.

Weighted average cost of capital (WACC)
 

2011

from 2012

Risk-free interest rate

3.3 %

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 equity1
(peer group structure)

85 %

85 %

Share of debt capital1
(peer group structure)

15 %

15 %

     

WACC after tax2

6.5 %

6.5 %

Tax rate

30 %

30 %

WACC before tax2

9.0 %

9.5 %

1 At market values.

2 Rounded.

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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 %

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9.0 %Group WACC before tax in
fiscal 2011.