Earnings, Asset and Financial Position of the Bayer Group

Value-Based Performance

New value-based indicator: ROCE

Starting with fiscal 2016, Bayer decided to replace its previous value-based metrics – cash value added (CVA) and cash flow return on investment (CFROI) – by the return on capital employed (ROCE). The change was made in light of the much lower complexity and greater external popularity of the ROCE. Using this indicator therefore increases transparency and facilitates both communication and external comparability. The ROCE indicates the capital return over a specified period, setting economic profit against the capital used to generate it (capital employed). The ROCE is compared to the weighted average cost of capital (WACC), which corresponds to the return expected by the providers of equity and debt. If the ROCE is in line with the WACC, the expected return for the period has been achieved. If it exceeds the WACC, return expectations have been exceeded, and therefore value has been created.

Calculation of ROCE

ROCE is the ratio of net operating profit after tax (NOPAT) to the average capital employed. NOPAT is determined by deducting from EBIT the income taxes thereon, which are based on a historical average tax rate of 24%. The capital employed is an indicator of the capital used in the company’s operations. Based on carrying amounts, it is calculated by subtracting from operational assets the liability items that are largely non-interest-bearing, such as trade accounts payable, or would distort the operational capital base. To reflect the change in the capital employed during the year, an average figure is determined from the amounts at the end of the previous year and the end of the year under report. For the components of the capital employed, see also Chapter “Alternative Performance Measures Used by the Bayer Group”.

Calculating the cost of capital

7.5%

Capital cost rate for the Bayer Group in 2016

In 2016, the capital cost rate (WACC = weighted average cost of capital) for the Bayer Group was applied uniformly for the Life Sciences This term describes Bayer’s activities in health care and agriculture and comprises the Bayer Group excluding its legally independent subsidiary Covestro. It refers to the businesses of the Pharmaceuticals, Consumer Health and Crop Science divisions and the Animal Health business unit. for the first time. The WACC is based on an after-tax approach and was calculated at the beginning of the year as the weighted average of the equity and debt cost rates. The cost of equity is the return expected by stockholders, computed from capital market information. The debt capital cost rate we use to calculate the WACC is based on the financing terms for ten-year Eurobonds issued by industrial companies with an “A–” credit rating. The WACC for 2016 was 7.5% for the Bayer Group and for the Life Sciences. Covestro, however, determined a WACC of 6.9% for its business. In the context of impairment testing, moreover, individual capital cost factors are used for the reporting segments which explicitly take account of segment-specific parameters (see the Note “Basic Principles, Methods and Critical Accounting Estimates”).

Value-based business development

11.0%

ROCE in 2016

Bayer’s ROCE in 2016 amounted to 11.0%, exceeding the cost of capital by 3.5 percentage points. It is thus an indicator for value creation. Also when measured in terms of the previous value-based steering parameters, Bayer showed positive value creation with a CFROI of 11.8%, which exceeded the cost of capital, and a positive CVA of €2,761 million.

All segments except Consumer Health exceeded the WACC in 2016 despite negative special items in all of the Life Science segments (see also Chapter “Business Development by Segment”). In Consumer Health, the acquisition of the consumer care business of Merck & Co., Inc., United States, in 2014 led to a significant increase in the capital employed. This, together with the integration costs and special charges incurred in 2016, is currently diminishing ROCE as an indicator of periodic capital return.

Value-Based Performance by Segment

 

 

Pharmaceuticals

 

Consumer Health

 

Crop Science

 

Animal Health

 

Life Sciences1

 

Covestro

 

Group

 

 

2015

2016

 

2015

2016

 

2015

2016

 

2015

2016

 

2015

2016

 

2015

2016

 

2015

2016

 

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

 

€ million

€ million

2015 figures restated

1

including Reconciliation

2

24% on EBIT; based on historical average of tax rates

EBIT

 

3,028

3,389

 

768

695

 

2,094

1,755

 

254

313

 

5,606

5,738

 

635

1,304

 

6,241

7,042

Taxes2

 

(727)

(813)

 

(184)

(167)

 

(503)

(421)

 

(61)

(75)

 

(1,346)

(1,377)

 

(152)

(313)

 

(1,498)

(1,690)

NOPAT

 

2,301

2,576

 

584

528

 

1,591

1,334

 

193

238

 

4,260

4,361

 

483

991

 

4,743

5,352

Average capital employed

 

15,969

15,859

 

14,761

15,220

 

9,749

10,316

 

404

375

 

40,975

42,306

 

6,822

6,471

 

47,797

48,777

ROCE

 

14.4%

16.2%

 

4.0%

3.5%

 

16.3%

12.9%

 

47.8%

63.5%

 

10.4%

10.3%

 

7.1%

15.3%

 

9.9%

11.0%

WACC

 

7.9%

7.5%

 

7.9%

7.5%

 

7.3%

7.5%

 

7.9%

7.5%

 

7.6%

7.5%

 

6.9%

6.9%

 

7.6%

7.5%