Key performance indicators
GEA’s overriding goal is to secure a sustainable increase in enterprise value. Operational management is based on the key drivers that have an immediate influence on value creation. Since the company focuses (see page 97) on growth, operating efficiency, and liquidity management, the most important key performance indicators are revenue, earnings, and the cash flow driver margin. In the process, GEA takes an organic view of revenue trends, i.e. before acquisition and currency effects. With respect to earnings, the company focuses on operating EBITDA. GEA defines “operating” as adjusted for effects resulting from the remeasurement of assets added due to acquisitions, and for expenses that are nonrecurring in terms of their nature or magnitude. For the purposes of analyzing and managing earnings, this performance indicator is also adjusted for acquisition and currency effects. The cash flow driver margin is defined as the net amount of EBITDA, the change in average working capital, and capital expenditure on property, plant, and equipment as well as intangible assets (all as reported), expressed as a ratio to revenue. GEA also regularly collates a range of other performance indicators in order to obtain a meaningful picture of the overall situation.
Revenue is analyzed by region and customer industry on a monthly basis in order to identify emerging market trends as early as possible. In this context, we also evaluate leading indicators: the GEA Demand Index (GDI – see page 84) and order intake.
To enable a rapid response to developments, the segments are also required to return regular forecasts – for the quarters and for the year as whole – for the key performance indicators revenue and operating EBITDA. In addition, these reports include forecasts of other performance indicators such as order intake and EBIT.
In order to create the requisite financial scope to achieve strategic growth and to focus the group even more closely on cash flow generation, a new key performance indicator – the cash flow driver margin – was introduced in 2012 and was also incorporated into the bonus system for senior management. Since 2014, this system has also been applied to a larger group of employees.
The return on capital employed (ROCE), calculated as the ratio of EBIT to capital employed, provides a further performance indicator for measuring the value added that is generated by the group’s operating activities. It therefore figures in both the group’s regular reporting activities and the calculation of variable, performance-related elements of management remuneration. In order to anchor ROCE even more strongly at an operational level, the ROCE drivers EBIT and EBIT margin, working capital – the key driver of capital employed – and the ratio of working capital to revenue are monitored continuously. When calculating capital employed, effects arising from the acquisition of the former GEA AG by the former Metallgesellschaft AG in 1999 are not taken into account.
The difference between the expected ROCE and the weighted average cost of capital (WACC) is a key criterion for investment and portfolio decisions. The group calculates WACC on the basis of the following factors: the cost of equity, based on the return yielded by an alternative, risk-free investment plus a market risk premium and the beta factor, actual borrowing costs, and the rate used to discount pension obligations.
Management of capital employed
Resources are allocated within the group primarily on the basis of strategic and medium-term planning. This provides the framework for preparing key decisions on core technologies, sales markets, and other strategically important variables.
Acquisitions and expansion investments are assessed not only on the basis of key performance indicators showing potential returns, but also in terms of their importance for achieving the group’s strategic goals. The key economic criterion for evaluating rationalization and expansion investments is the net present value. The payback period is also calculated as an additional benchmark for assessing the risk arising from changing economic conditions.
Working capital is another key element of capital employed. Working capital management begins before an order is accepted with the payment terms that are offered or negotiated.
Project- and activity-based management
In addition to general management with the aid of the key performance indicators described above, the group has established individual assessment and approval procedures for customer and investment projects, utilizing specific thresholds for the different hierarchy levels. Customer projects are evaluated primarily on the basis of their expected margins (gross margin on a fully absorbed cost basis) and of their commercial and contractual risk profile, with a particular emphasis on cash flow. Project management is also backed up by extensive project control not only at operating unit level but also – depending on the size of the project involved – at segment or group level in the form of a separate reporting system for major contracts. In many cases, the findings gained from this analysis yield suggestions for improving internal processes, which can be used in subsequent projects. At group level, the analysis focuses on
deviations between the calculated and the expected or realized contract margin.