Deutsche Post DHL Annual Report 2014

2014 Annual Report

Group management

Excerpts from Deutsche Post AG's 2014 Group Annual Report.

Financial Performance Indicators

Impact on management compensation

Deutsche Post DHL Group uses both financial and non-financial performance indicators in its management of the Group. The monthly, quarterly and annual changes in these indicators are compared with the data from the prior year as well as the data indicated in the plan to assist in making management decisions. The year-to-year changes in financial and non-financial performance metrics portrayed here are also relevant for calculating management remuneration.

The Group’s financial performance indicators are intended to preserve a balance between profitability, efficient use of resources and sufficient liquidity. The performance of these indicators in the reporting year is described in the Report on economic position.

Profit from operating activities measures earnings power

The profitability of the Group’s operating divisions is measured as profit from operating activities (EBIT). EBIT is calculated as revenue and other operating income minus materials expense and staff costs, depreciation, amortisation and impairment losses as well as other operating expenses and adding net income from investments accounted for using the equity method. Interest and other finance costs/other financial income are deducted from or added to net financial income/net finance costs. To be able to compare divisions, the return on sales is calculated as the ratio of EBIT to revenue.

EBIT calculation
Revenue
Other operating income
Materials expense
Staff costs
Depreciation, amortisation and impairment losses
Other operating expenses
Net income from investments accounted for using the equity method
Profit from operating activities (EBIT)

EBIT after asset charge promotes efficient use of resources

Since 2008, the Group has used EBIT after asset charge (EAC) as an additional key performance indicator. EAC is calculated by subtracting the cost of capital component, or asset charge, from EBIT. Making the asset charge a part of business decisions encourages all divisions to use resources efficiently and ensures that the operating business is geared towards increasing value sustainably whilst generating increasing cash flow.

EAC calculation
EBIT
Asset charge
= Net asset base
× Weighted average cost of capital (WACC)
EBIT after asset charge (EAC)

To calculate the asset charge, the net asset base is multiplied by the weighted average cost of capital (WACC). The asset charge calculation is performed each month so that fluctuations in the net asset base can also be taken into account during the year.

All of our divisions use a standard calculation for the net asset base. The key components of operating assets are intangible assets, including goodwill, property, plant and equipment and net working capital. Operating provisions and operating liabilities are subtracted from operating assets.

Net asset base calculation
Operating assets
• Intangible assets
• Property, plant and equipment
• Goodwill
• Trade receivables (included in net working capital)
• Other non-current operating assets
Operating liabilities
• Operating provisions (not including provisions for pensions and similar obligations)
• Trade payables (included in net working capital)
• Other non-current operating liabilities
Net asset base

The Group’s WACC is defined as the weighted average net cost of interest-bearing liabilities and equity, taking into account company-specific risk factors in accordance with the Capital Asset Pricing Model.

A standard WACC of 8.5% is applied across the divisions and this figure also represents the minimum target for projects and investments within the Group. The WACC is generally reviewed once annually using the current situation on the financial markets. However, the goal is not to match every short-term change but to reflect long-term trends. To ensure better comparability with previous years, the WACC was maintained at a constant level in 2014, compared to the previous years.

Ensuring sufficient liquidity

Along with EBIT and EAC, cash flow is a further main performance metric used by the Group management. This performance metric is targeted at maintaining sufficient liquidity to cover all of the Group’s financial obligations from debt repayment and dividends, in addition to operating payment commitments and investments.

Calculation of free cash flow
EBIT
Depreciation, amortisation and impairment losses
Net income/loss from disposal of non-current assets
Non-cash income and expense
Change in provisions
Change in other non-current assets and liabilities
Dividends received
Income taxes paid
Operating cash flow before changes in working capital (net working capital)
Changes in net working capital
Net cash from/used in operating activities (operating cash flow – OCF)
Cash inflow/outflow arising from change in property, plant and equipment and intangible assets
Cash inflow/outflow arising from acquisitions/divestitures
Net interest paid
Free cash flow (FCF)

Cash flow is calculated using the cash flow statement. Operating cash flow (OCF) includes items that are related directly to operating value creation. It is calculated by adjusting EBIT for changes in non-current assets (depreciation, amortisation and (reversals of) impairment losses, net income/loss from disposals), other non-cash income and expense, dividends received, taxes paid, changes in provisions and other non-current assets and liabilities. Net working capital remains a driver for OCF. Effective management of net working capital is an important way for the Group to improve cash flow in the short to medium term. Free cash flow (FCF) is calculated on the basis of OCF by adding/subtracting the cash flows from capital expenditure, acquisitions and divestitures as well as net interest paid. Free cash flow is considered to be an indicator of how much cash is available to the company for dividend payments or the repayment of debt. Given its higher relevance for the Group’s management and other stakeholders, we shall use the Group FCF instead of OCF as financial Performance indicator from 2015 onwards.

Non-financial Performance Indicator

Employee Opinion Survey result as a management indicator

Our annual worldwide Employee Opinion Survey shows us how we are perceived as a group from the perspective of our employees. We place particular significance on the survey’s indication of Employee Engagement and of how employees rate the leadership behaviour of their superiors. The Active Leadership indicator is thus used in the calculation of bonuses for our executives. The results of the Employee Opinion Survey carried out in the reporting year can be found in the Employees section.

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Deutsche Post DHL

2014 Annual Report

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