Group and Division KPIs 

The three Group and division KPIs, namely sales, EBITDA pre and business free cash flow, are the most important financial KPIs used to assess the operational performance of the Merck Group and its divisions. Reference to these KPIs can therefore be found in the report on economic position, the report on risks and opportunities, and in the report on expected developments. As the most important indicators of Merck’s financial business performance, the Group and division KPIs are key elements of Merck’s performance management and incentive system.

Sales

Sales are defined as the sales of goods and services rendered to external customers net of value added tax and after sales deductions such as rebates or discounts. Sales are the main indicator of business growth in the Merck Group and therefore an important parameter of external as well as internal performance measurement.

EBITDA pre

EBITDA pre is the main performance indicator measuring ongoing operational profitability and is used internally and externally. To allow for an understanding of the underlying operational performance of the Merck Group and its four divisions, it excludes from the operating result depreciation and amortization in addition to specific income and expenses of a one-time nature. One-time items within EBITDA are restricted to five categories: integration costs/IT costs, restructuring costs, gains/losses on the divestment of business, acquisition costs and other one-time items. The classification of specific income and expense as one-time items follows clear definitions and underlies strict governance at corporate level. For example IT costs, which are not related to the integration of an acquired business, can only be classified as one-time items if they are related to a fundamental change in the global IT landscape of the Merck Group or a division. Also, the category restructuring costs only includes one-time charges for globally defined and centrally approved restructuring programs. Restructuring costs incurred in 2012 and 2013 were directly related to the Group-wide “Fit for 2018” transformation and growth program.

Within the scope of internal performance management, EBITDA pre allows for the necessary changes or restructuring without penalizing the performance of the operating business.

Business free cash flow (BFCF)

Apart from EBITDA pre and sales, business free cash flow (BFCF) is the third important Group and division KPI and therefore also used for internal target agreements and individual incentive plans. It comprises the major cash-relevant items that the individual businesses can influence. Broken down to the divisional level, it sums up EBITDA pre less main cash items such as investments in property, plant and equipment, software, advance payments for intangible assets, as well as changes in inventories and trade accounts receivable, all of which are under full control of the individual businesses. To manage working capital on a regional and local level, our businesses use the two indicators DSO (days sales outstanding) and DSI (days sales in inventory). The introduction of business free cash flow has led to considerable improvements in cash awareness as well as reduced working capital requirements.

Investments and value management

Sustainable value creation is essential to secure the long-term success of our company. To optimize the allocation of financial resources we use a defined set of parameters as criteria for the prioritization of investment opportunities and portfolio decisions.

Net present value (NPV)

The main criterion for the prioritization of investment opportunities is net present value. It is based on the discounted cash flow method and is calculated as the sum of the discounted free cash flows over the projection period of a project. Consistent with the definition of free cash flow, the weighted average cost of capital (WACC), representing the weighted average of the cost of equity and cost of debt, are used as the discount rate. Depending on the type and location of a project different mark-ups are applied to the WACC.

Return on capital employed (ROCE)

In addition to NPV, ROCE is an important metric for the assessment of investment projects. It is calculated as the operating result (EBIT) excluding one-time items divided by the sum of property, plant and equipment, intangible assets and working capital.

Payback period

An additional parameter to prioritize investments into property, plant and equipment is the payback period, which indicates the time in years after which an investment will generate positive net cash flow.

Merck value added (MEVA)

MEVA gives information about the value created in a period. Value is created when the return on the company’s or divisional capital employed (ROCE) is higher than the weighted average cost of capital (WACC). MEVA metrics provide Merck with a powerful tool to weigh investment and spending decisions against capital requirements and investors’ expectations.