Responsible corporate management based on transparent performance indicators
The DEUTZ Group defines its budget targets and medium-term corporate targets using selected key performance indicators (KPIs). In order to increase profitability and achieve sustained growth, we manage the Group on the basis of the following financial performance indicators:
|EBIT margin (before exceptional items)||%||2.9||1.9|
|Working capital ratio 1) (average)||%||13.4||17.9|
|ROCE (before exceptional items) 1)||%||5.5||3.1|
|Free cash flow 1)||€ million||82.5||4.7|
|1) These KPIs are alternative performance measures that are not defined in the International Financial Reporting Standards (IFRS). A reconciliation of these KPIs to the amounts recognised in the financial statements is provided below.|
DEUTZ aims to steadily increase revenue as the basis for the profitable growth of the Company. The level and growth of revenue is determined on a monthly basis, broken down by product group, application segment and region. This data is provided to senior management promptly so that it can react quickly to changes as they materialise.
EBIT margin (before exceptional items)
The main key performance indicator that we use to manage the Company’s operating performance is the EBIT margin before exceptional items. This is based on the Group’s earnings before interest and tax (EBIT). The EBIT figure is then adjusted for exceptional items and calculated as a percentage of revenue. We define exceptional items as significant income generated or expenses incurred outside the scope of the Company’s ordinary business activities that are unlikely to recur. Adjusting for exceptional items enables a more accurate comparison of the Company’s operating performance over time. The EBIT margin before exceptional items is, like revenue growth, calculated monthly and presented to senior management as part of internal reporting. The table below shows the calculation of the adjusted EBIT margin for the reporting year. There had been no exceptional items in 2016.
|EBIT margin (before exceptional items)|
|Proceeds from the sale of the Cologne-Deutz site||–98.8|
|Proceeds from the sale of a building lease in Hamburg||–10.0|
|Transaction costs in relation to Torqeedo and IML||4.7|
|Total exceptional items||–104.1|
|EBIT (before exceptional items)||42.4|
|EBIT margin (before exceptional items)||2.9 %|
The exceptional items include a gain of €98.8 million, after deduction of transaction costs, resulting from the disposal of the land occupied by our former Cologne-Deutz site. There was also a €10.0 million gain relating to the disposal of the building lease of our subsidiary Ad. Strüver for a plot of land in Hamburg that was no longer being used for production purposes.
These positive exceptional items were partly offset by negative exceptional items of €4.7 million in the year under review. Legal and consultancy costs of €4.7 million arose in connection with the acquisition of Torqeedo GmbH, Gilching, and IML Motori S.r.l., Milan, Italy, which were completed in the fourth quarter of 2017.
Working capital ratio (average)
We manage the Company’s tied-up capital using the average working capital ratio. This is the ratio of average working capital over the past four quarters to revenue for the preceding twelve months. Working capital comprises inventories plus trade receivables less trade payables. Along with revenue growth and the EBIT margin (before exceptional items), this key figure is calculated monthly and presented to senior management.
ROCE (before exceptional items)
The return on the capital employed in the Group is measured and managed on an annual basis using the key figure ROCE (before exceptional items). This is calculated as follows:
|Cash and cash equivalents||–143.8||–91.8|
|Other current and non-current liabilities||–71.3||–57.3|
|Capital employed (average for the year)||769.4||752.7|
|EBIT (before exceptional items)||42.4||23.4|
|ROCE (before exceptional items)||5.5 %||3.1 %|
As a technology-focused company, we consider the R&D ratio to be one of the most significant performance indicators in our internal management system. It is the ratio of research and development expenditure (after reimbursements) to revenue in the period in question. The R&D ratio is calculated at least once a quarter and is reported to senior management.
Free cash flow
The DEUTZ Group uses free cash flow as its main performance indicator for managing liquidity. It comprises net cash provided by, and used for, the operating activities and investing activities of the Group during the period in question less interest payments in connection with financing activities. We can thus show what cash flow generated in the relevant year is available to the Company, e.g. for repaying liabilities or paying a possible dividend to shareholders. Free cash flow is reported to senior management at least once a quarter.
Based on these performance indicators, DEUTZ has set up an early warning system in order to be proactive and respond promptly. At the same time, we operate a sound system of causal analysis to ensure that we minimise risks and make the most of opportunities. Three times a year we produce an annual forecast for all key performance indicators.
In addition to the financial performance indicators which form part of the management system described above, we also employ a range of other parameters to measure our economic performance. These include, but are not limited to, new orders received, revenue and unit sales on the income side, the working capital as at the reporting date with regard to tied-up capital, and earnings before interest, taxes, depreciation and amortisation (EBITDA). Moreover, the Group net income and the DEUTZ AG statutory income in accordance with the German Commercial Code are significant factors for us as regards dividend payments.