4.4 Value Management

Cash value added-based system

One of the prime objectives of the Bayer Group is to sustainably increase enterprise value. In 1994 we became one of the first German companies to embark on the development of a value management system, which we introduced throughout the Group in 1997. The system is used for the planning, controlling and monitoring of our businesses. Our primary value-based indicator is the cash value added (CVA), which shows the degree to which the cash flows needed to cover the costs of equity and debt and of reproducing depletable assets have been generated. If the CVA is positive, the company or business entity concerned has created value. If it is negative, the anticipated capital and asset reproduction costs have not been earned. info

Gross cash flow and CVA are profitability indicators for a single reporting period. For a year-on-year comparison we therefore use the delta CVA, which is the difference between the CVAs of two consecutive periods. A positive delta CVA shows that value creation has improved from one period to the next.

Calculating the cost of capital

Bayer calculates the cost of capital according to the debt/equity ratio by the weighted average cost of capital (WACC) formula. The cost of equity capital is the return expected by stockholders, computed from capital market information. The cost of debt used in calculating WACC is based on the terms for a ten-year corporate bond issue.

To take into account the different risk and return profiles of our principal businesses, we calculate individual capital cost factors after income taxes for each of our subgroups. In 2009 this was 8.0% (2008: 8.0%) for HealthCare, 7.5% (2008: 7.5%) for CropScience and 7.0% (2008: 7.0%) for MaterialScience. The minimum return required for the Group in 2009 was 7.8% (2008: 7.5%).

Gross cash flow, cash flow return on investment and cash value added as performance yardsticks

The gross cash flow as published in our statement of cash flows is the measure of our internal financing capability. Bayer has chosen this parameter because it is relatively free of accounting influences and thus a more meaningful performance indicator.

The profitability of the Group and of its individual business entities is measured by the cash flow return on investment (CFRoI). This is the ratio of the gross cash flow to the capital invested, which is derived from the statement of financial position and basically comprises the property, plant and equipment and intangible assets required for operations – stated at cost of acquisition or construction – plus working capital, less interest-free liabilities (such as current provisions). To allow for fluctuations in the capital invested, the CFRoI is computed on the basis of the average figure for the respective year.

Taking into account the costs of capital and of reproducing depletable assets, we determine the gross cash flow hurdle. If the gross cash flow hurdle is equaled or exceeded, the required return on equity and debt plus the cost of asset reproduction has been earned. The CFRoI hurdle for 2009 was 10.4% (2008: 10.1%), while the corresponding gross cash flow hurdle was €4,431 million (2008: €4,049 million).

Actual gross cash flow came in at €4,658 million, exceeding the hurdle by 5.1%. Thus in 2009 we earned our entire capital and asset reproduction costs, and the positive CVA of €227 million shows that Bayer created value. Given the previous year’s CVA of €1,246 million, the Bayer Group therefore recorded a negative delta CVA of €1,019 million, showing that value creation was markedly lower than in the previous year. The CFRoI for 2009 amounted to 10.9% (2008: 13.0%).

HealthCare and CropScience exceeded their target returns including asset reproduction, while MaterialScience – unlike in previous years – was unable to reach the gross cash flow hurdle in the crisis year 2009. The CFRoI for HealthCare was 13.6% (2008: 13.6%). CropScience was below the previous year with a CFRoI of 11.6% (2008: 14.1%). MaterialScience recorded a CFRoI of only 3.7% (2008: 10.1%).

Value Management Indicators by Subgroup							[Table 3.18]
	HealthCare		CropScience		MaterialScience		Bayer Group
	2008	2009	2008	2009	2008	2009	2008	2009
	€ million	€ million	€ million	€ million	€ million	€ million	€ million	€ million
Gross cash flow hurdle (GCF hurdle)	2,387	2,589	906	902	696	775	4,049	4,431
Gross cash flow* (GCF)	3,045	3,153	1,192	1,043	850	319	5,295	4,658
Cash value added (CVA)	658	564	286	141	154	(456)	1,246	227
Delta cash value added	663	(94)	264	(145)	(450)	(610)	497	(1,019)
CFRoI hurdle	10.9%	11.1%	10.8%	10.6%	8.7%	8.7%	10.1%	10.4%
Cash flow return on investment (CFRoI)	13.6%	13.6%	14.1%	11.6%	10.1%	3.7%	13.0%	10.9%
Average capital invested	22,380	23,261	8,471	8,967	8,442	8,686	40,862	42,811
* for definition see “Liquidity and Capital Expenditures of the Bayer Group”