Value management and performance management system
In order to set and achieve our strategic goals more effectively, we are pursuing a Group-wide value management approach. Ultimately, specific performance indicators are required to measure success. The basis for this is a reliable and understandable performance management system. The following tables and information provide an overview of our key financial and non-financial performance indicators.
|Financial performance indicators|
|Net revenue||billions of €||74.9||73.1||69.2||62.7||60.1|
|Profit (loss) from operations (EBIT)||billions of €||9.4||9.2||7.0||7.2||4.9|
|EBITDA (adjusted for special factors)||billions of €||22.2||21.4||19.9||17.6||17.4|
|Free cash flow (before dividend payments, spectrum investment) a||billions of €||5.5||4.9||4.5||4.1||4.6|
|Cash capex b||billions of €||(12.1)||(11.0)||(10.8)||(9.5)||(8.9)|
|Rating (Standard & Poor’s, Fitch)||BBB+||BBB+||BBB+||BBB+||BBB+|
|a And before AT&T transaction and compensation payments for MetroPCS employees.
b Before spectrum investment.
In order to underline the importance of the successful long-term development of our Group, we have incorporated sustainable growth in enterprise value into our medium-term aims and implemented it as a separate KPI (key performance indicator) for the entire Group. Return on capital employed (ROCE) is our central performance indicator. ROCE is the ratio of operating result after depreciation, amortization and impairment losses plus imputed taxes (net operating profit after taxes (NOPAT)) to the average value of the assets tied up for this purpose in the course of the year (net operating assets, NOA).
ROCE is the performance indicator that helps us to embed our aim of sustainably increasing the value of our Group across all operational activities. Additional value accrues when the return on capital employed exceeds the cost of capital. Our goal, therefore, is to achieve or exceed the return targets imposed on us by providers of debt capital and equity on the basis of capital market requirements. We measure return targets using the weighted average cost of capital (WACC).
|Calculation of the ROCE financial performance indicator|
|millions of €|
|Profit from operations (EBIT)||9,383||9,164||7,028|
|Share of profit (loss) of associates and joint ventures accounted for using the equity method||76||(53)||24|
|Interest component of unrecognized rental and lease obligations||525||573||725|
|Other NOPAT adjustments||0||0||0|
|Net operating profit (NOP)||9,984||9,684||7,777|
|Tax (imputed tax rate 2017: 31.5 %; 2016: 30.3 %; 2015: 30.3 %)||(3,145)||(2,934)||(2,356)|
|Net operating profit after taxes (NOPAT)||6,839||6,750||5,421|
|Cash and cash equivalents||3,312||7,747||6,897|
|Operating working capital||(3,555)||(5,056)||(5,311)|
|Property, plant and equipment||46,878||46,758||44,637|
|Non-current assets and disposal groups held for sale a||161||372||849|
|Investments accounted for using the equity method||651||725||822|
|Present value of unrecognized rental and lease obligations||13,127||14,320||18,137|
|Other NOA adjustments||0||0||0|
|Net operating assets (NOA)||117,322||119,356||117,243|
|Average net operating assets (Ø NOA)||118,927||119,101||112,441|
|a Excluding the carrying amounts of companies accounted for using the equity method.|
NOPAT is an earnings indicator derived from the income statement. As it does not take cost of capital into account, it also includes the interest component of unrecognized rental and lease obligations.
NOA include all assets that make a direct contribution to revenue generation. These include all elements on the asset side of the consolidated statement of financial position that are essential to the rendering of services. Operating working capital is calculated from trade and other receivables, inventories, trade and other payables, as well as additional current and non-current assets and liabilities selected in line with the internal steering logic. NOA also include rental and operating lease obligations recognized by the lessor where required for operations. The figure for other provisions is deducted as no return target exists for this.
We believe that ROCE best reflects the expectations of the four aforementioned stakeholders. The indicator measures how efficiently we generate revenues with the capital employed. ROCE is especially informative when taking a long-term view, because it takes into account both the immense value of the assets that are tied up in our capital-intensive infrastructure, and their utilization. This reveals the crucial advantage of this KPI. It does not focus on the absolute amount of the earnings generated, but rather how much earnings the capital employed generates. ROCE has given us a holistic perspective from which to consider our investments with fresh insight.
REVENUE AND EARNINGS
Revenue corresponds to the value of our operating activities. Absolute revenue depends on how well we are able to sell our products and services on the market. The development of our revenue is an essential indicator for measuring the Company’s success. New products and services as well as additional sales activities are only successful if they increase revenue.
EBITDA corresponds to EBIT (profit/loss from operations) before depreciation, amortization and impairment losses. EBIT and EBITDA measure the short-term operational performance and the success of individual business areas. We also use the EBIT and EBITDA margins to show how these indicators develop in relation to revenue. This makes it possible to compare the earnings performance of profit-oriented units of different sizes. Taking unadjusted EBIT/EBITDA as performance indicators means special factors are also taken into account. This promotes a holistic view of our costs. However, special factors have an impact on the presentation of operations, making it more difficult to compare performance indicators with corresponding figures for prior periods. For this reason, we additionally adjust our performance indicators to provide transparency. Without this adjustment, statements about the future development of earnings are only possible to a limited extent. The adjusted values are calculated on the basis of the unadjusted performance indicators. For the reconciliation of EBITDA, EBIT, and net profit/loss to the respective figures adjusted for special factors, please refer to the table.
We define free cash flow as net cash from operating activities less net cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment. This indicator is the main yardstick for providers of debt capital and equity. It measures the potential for further developing our Company, for generating organic growth, and for the ability to pay dividends and repay debt.
Central free cash flow management is responsible for transparency, steering, forecasts, and performance measurement in relation to free cash flow and especially in relation to working capital. As part of our measures to optimize working capital over the long term, in the reporting year the focus was on further extending the period of payment for our payables in Germany and Europe, expanding inventories management there, and further optimizing receivables management in all our operating segments, which also involved factoring measures. We plan to continue down this route in the coming years by focusing on the following areas: extending the period of payment for payables and improving receivables and inventories management in the United States, Germany, and Europe.
Cash capex (before spectrum investment) relates to cash outflows for investments in intangible assets (excluding goodwill) and property, plant and equipment, which are relevant for cash outflows as a component of free cash flow.
A rating is an assessment or classification of the creditworthiness of debt securities and its issuer according to uniform criteria. Assessment of creditworthiness by rating agencies influences interest rates on debt securities and thus also our borrowing costs. As part of our finance policy, we have defined a target range for our ratings. We are convinced that with a rating between A- and BBB (Standard & Poor’s, Fitch) or between A3 and Baa2 (Moody’s) we essentially have the necessary entry to the capital markets to generate the required financing.
NON-FINANCIAL PERFORMANCE INDICATORS
|Non-financial performance indicators|
|Customer satisfaction (TRI*M index)||68.6||70.2||67.4||65.9||64.9|
|Employee satisfaction (commitment index) a||4.1||4.1||4.1||4.0||4.0|
|Fixed-network and mobile customers|
|Mobile customers millions||millions||168.4||165.0||156.4||150.5||142.5|
|Fixed-network lines millions||millions||27.9||28.5||29.0||29.8||30.8|
|Broadband lines b millions||millions||19.0||18.5||17.8||17.4||17.1|
|Order entry c||millions of €||5,241||6,851||5,608||7,107||7,792|
|a Commitment index according to the most recent employee surveys in 2017 and 2015.
b Excluding wholesale.
c The prior-year comparative for 2016 was adjusted retrospectively due to the change in the structure of the Group implemented as of January 1, 2017.
For more information, please refer to Note 31 “Segment reporting” in the notes to the consolidated financial statements.
As one of the leading providers of telecommunications and information technology worldwide, the development of our Group – and thus also our financial performance indicators – is closely linked to the development of customer figures. Acquiring and retaining customers are thus essential to the success of our Company. We have different ways of measuring the development of our customer figures according to the business activity in our operating segments: Depending on the activities of each segment, we measure the number of mobile customers and/or the number of broadband and fixed-network lines.
We want our customers to be satisfied – or even delighted – as satisfied customers act as multipliers for our Company’s success. As a responsible, service-oriented company, the needs and opinions of our customers are of great importance to us, and we want them to stay with our Company in the long term. For this reason we measure customer retention/satisfaction in our companies using the globally recognized TRI*M method. The results of systematic surveys are expressed by an indicator known as the TRI*M index. To underscore the major significance of customer retention/satisfaction for our operations, since 2010 we have made this key indicator one of four parameters for the long-term variable remuneration (Variable II) for our Board of Management members. It is also used as a parameter in the long-term incentive plan, which was launched in 2015 and is offered to our managers (with the exception of Board of Management members). We take the TRI*M indexes calculated for the operating entities as an approximation of the respective entities’ percentage of total revenue to create an aggregate TRI*M Group value. Over a period of four years, the eligible managers can benefit from the development of customer retention/satisfaction across the Group. For more information on customer satisfaction, please refer to the section “Group strategy."
Our employees want to contribute to the further development of the Company and identify with it. We want to establish an open dialog and a productive exchange with our employees: New ways of working and modern means of communication help us achieve this, as do regular surveys. The most important feedback instruments across the Group (excluding T-Mobile US) for assessing employee satisfaction include regular employee surveys and the pulse survey carried out twice a year. In our Company, we measure the employee satisfaction performance indicator using the commitment index – derived from the results of the last employee survey and updated with the results of the last pulse survey. 8 For more information on employee satisfaction, please refer to the section “Employees."
In view of the major significance of employee satisfaction for the success of the Company, Board members are now also being managed and incentivized by means of the long-term variable performance-based remuneration (Variable II). Employee feedback as one of four parameters has been relevant for Variable II since 2010, and for the long-term incentive plan which was relaunched in 2015 for our managers (excluding Board members). This allows Board members and eligible managers to benefit from the development of employee satisfaction across the Group.
In our Systems Solutions operating segment, we use order entry as a non-financial performance indicator. We define and calculate order entry as the total of all amounts resulting from customer orders that are yet to be processed. Order entry in the form of long-term contracts is of great significance to the Group in order to estimate revenue potential. In other words, order entry is an indicator that provides a high degree of planning reliability.