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The goal of continuous value growth is a key element of our strategy. To achieve it, we deploy a value-driven manage- ment system that allows us to keep the Group portfolio rigorously on target.
Our return on net assets (RONA) performance metric makes value growth measurable, ensuring transparency across the full range of reporting levels and throughout the Group. It is integrated into all planning and reporting systems and also feeds into portfolio and investment decisions pointing the way forward. Value-based performance measures are used alongside indicators focusing on earnings and cash flow as key components of a financial control system that creates Group-wide transparency and lays the foundations for profitable growth.
Value-driven management is fostered by making value created an integral parameter in the management com- pensation system. By building targets for value created directly into the components of performance-linked com- pensation, we keep management motivation closely aligned with Group and shareholder interests. 5HWXUQRQ1HW$VVHWV521$
The two main control parameters relating to return on capital are RONA and value created.
If RONA exceeds weighted average cost of capital (WACC), value created is positive, which means the Group is gener- ating value. Expressed in absolute terms, value created is RONA, minus WACC, times average net assets.
RONA is return as a percentage of net assets and indicates how well HOCHTIEF’s assets are performing as an invest- ment. Return is defined for this purpose as operating earn- ings (EBITA, shown in the Operational Statement of Earn- ings) plus interest income from the Group’s financial assets.
The net assets figure reflects the total capital commitment from which returns are to be generated. Net assets can be calculated starting from the assets side or the liabilities side of the balance sheet.
For divisional management purposes, net assets are determined starting from the assets side by taking total assets and deducting non-interest-bearing liabilities. The assets-side calculation is useful for watching over operating activities as it highlights accounting parameters that operational managers must aim to optimize, such as trade accounts receivable, trade accounts payable and liquidity.
For the HOCHTIEF Group’s external reporting purposes, net assets are determined from figures on the liabilities side of the balance sheet. Net assets are obtained in a simple and easy-to-follow calculation by adding interest-bearing liabilities items on the published balance sheet (sharehold- ers’ equity, pension provisions, and financial liabilities). Since RONA is calculated on a pre-tax basis, deferred taxes are eliminated from the net assets figure to remove tax effects.
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Cost of capital is calculated on a weighted average basis. A number of parameters in the equation were reviewed in the year under review. Favorable effects of a German cor- porate tax reform resulting in a drop in cost of capital were canceled out by a higher figure for required return on equity. Following adjustments in various parameters, the Group’s weighted average cost of capital (WACC) stands at ten percent before tax, which is identical in absolute terms to the prior year. The factors affecting cost of capital are reg u- larly checked and revised in line with changes in the mar- ket environment.
*For a detailed calculation of cost of capital, please see www.hochtief.com. For further information on our use of RONA as a measure of return on capital, please see our website, www.hochtief. com.
* See page 67 for the deriva- tion of operating earnings (EBITA).
** Interest income is adjusted to eliminate interest from ad- vance payments received, which is already included as an interest credit in EBITA. +2&+7,()*URXSSHUIRUPDQFH
The HOCHTIEF Group generated 13.5 percent return on capital in fiscal 2008 (versus 14.9 percent in 2007). The cost of capital was once again significantly exceeded.
The Group generated a return of EUR 719.3 million, nearly an 18 percent improvement on the prior year. Average net assets rose year on year from EUR 4.1 billion to EUR 5.3 billion. This represents growth of some 29 percent. The in- crease in net assets is due to the Group’s strong capital expenditure in the last two years.
Value created by the HOCHTIEF Group was on a par with the solid level achieved in the prior year, at EUR 186.6 million. All divisions, with the exception of HOCHTIEF Europe, reported a positive figure for value created despite the difficult economic situation. This is a result of our sus- tained strategy geared to value growth.
Divisional value created
Division-specific figures are determined for the cost of capital to facilitate the measurement and comparison of divisional performance. The use of a separate cost of capital for each division is made necessary by the divi- sions’ differing business models and regional focus. The +2&+7,()$PHULFDV division once again comfort- ably exceeded its cost of capital with RONA of 19 percent (2007: 21.8 percent). As a result of very healthy growth at our US subsidiaries Turner and Flatiron, the division gener- ated a return of EUR 90.2 million, up some 15 percent on the prior year. The impact of adverse exchange rate effects on this figure was more than offset by higher operating earnings. The latter rise is not fully reflected in RONA be- cause of a substantial year-on-year increase to net assets. This was due to Flatiron being included in full in average net assets for the first time.
+2&+7,()$VLD3DFLƂF again kept well ahead of its cost of capital, generating RONA of 22.7 percent (2007: 32.2 percent). Operating earnings, at EUR 435.3 million, almost regained their high prior-year level. Most of the increase in net assets is accounted for by acquisitions of business interests for Al Habtoor, Devine Limited and MacMahon, the full amount of these acquisitions being included in net assets for the first time. At EUR 213 million, value created is down on the prior year due to the reduced return com- bined with the increase in net assets.
The +2&+7,()&RQFHVVLRQV division achieved RONA of 14 percent (2007: 20.7 percent), above its cost of capital. Our airport holdings performed well above expectations in the year, producing a return of EUR 145.2 million. When looking at the comparative prior-year figures, it should be borne in mind that the EUR 186.9 million earnings record in 2007 included extraordinary income due to a German cor- porate tax reform, a special dividend from Sydney Airport and success fees for Budapest Airport. As a result of its strong earnings, +2&+7,()$LUSRUW once again signifi- cantly exceeded its cost of capital with RONA of 14.2 per- cent (2007: 22.1 percent). Net assets grew mostly as a result of the purchase of the stake in Budapest Airport +2&+7,()*URXS5HWXUQRQQHWDVVHWV521$
(EUR million) 2007
Operating earnings (EBITA)* 676.1 539.5
+ Interest income** 43.2 72.2
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Shareholders’ equity (including
minority interests) 2,861.4 3,000.8
+ Pension provisions 76.7 29.0
+ Financial liabilities 2,926.8 1,966.8
– Deferred tax assets 204.7 169.4
+ Deferred tax liabilities 93.8 82.1
Net assets at December 31 5,754.0 4,909.3
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and of additional shares in Sydney Airport. The EUR 41 million value created figure underscores the stable growth trend at our airports.
+2&+7,()3336ROXWLRQV likewise exceeds its required minimum return with RONA of 13 percent (2007: 14.9 per- cent). The return was up on the prior year. A larger number of projects also meant a year-on-year boost in net assets. At around EUR 8 million, value created was slightly down from the prior-year figure, as net assets grew proportion- ately faster than return.
+2&+7,()(XURSH achieved RONA of 0.4 percent (2007: minus 21.2 percent). Although value created is still nega- tive, it represents a marked improvement on the prior year. The upward trend in new orders and the initiated restruc- turing in German building construction delivered a sharp boost to earnings. Our international activities also contrib- uted to stronger earnings growth. We expect to have value added back in positive figures by the medium term. +2&+7,()5HDO(VWDWH significantly improved on its prior- year earnings with strong rentals on real estate develop- ments in progress. At 10.2 percent (2007: 12.7 percent), its return was once again above its cost of capital. The slight drop compared with the prior year reflects substantial growth in net assets. The increase in net assets is due to a higher number of project starts and the acquisition of aurelis Real Estate.
The +2&+7,()6HUYLFHV division likewise delivered a further stable contribution to the Group’s successful results. It again exceeded its minimum return requirement, with RONA of 16.0 percent (2007: 16.6 percent). The division achieved a 25 percent year-on-year increase in return, primarily from the expansion of its international activities and earnings contributed by its energy management busi- ness. Value created came to EUR 11.4 million, above the prior-year figure as a result of the broadened asset base. Net assets increased as the average net assets figure now includes the business acquisition in energy management in full.
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The strong business performance in 2008 underscores our strategy geared to sustained value growth. All divisions aside from HOCHTIEF Europe achieved positive figures for value created.
We currently expect to generate stable value created for our shareholders, workforce and clients in fiscal 2009. However, the forward outlook depends substantially on the general economic environment.
*Figures for HOCHTIEF Airport adjusted (for further informa- tion, please see page 68 of the Annual Report 2007 or www. hochtief.com). Divisions Return 2008 (EUR million) Net assets 2008 (EUR million) RONA 2008 (%) WACC 2008 (%) Value created 2008 (EUR million) Value created 2007 (EUR million) HOCHTIEF Americas 90.2 474.0 19.0 14.1 23.2 27.8
HOCHTIEF Asia Pacific 435.8 1,920.7 22.7 11.6 213.2 292.1
HOCHTIEF Concessions 174.5 1,250.9 14.0 10.1 48.8 110.2
Of which: HOCHTIEF Airport* 145.2 1,024.6 14.2 10.2 41.0 100.8
Of which: HOCHTIEF PPP
Solutions 29.4 226.9 13.0 9.6 7.7 10.2
HOCHTIEF Europe 2.2 544.3 0.4 11.3 (59.3) (172.5)
HOCHTIEF Real Estate 90.6 891.7 10.2 9.6 5.4 17.6
HOCHTIEF Services 28.4 177.8 16.0 9.6 11.4 9.6
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HOCHTIEF achieved further significant growth in value added in the year under review. Net value added rose in 2008 compared with 2007 by EUR 571.7 million to EUR 3,977.2 million. This represents an increase of some 17 percent.
The growth was mainly driven by the rising value contribu- tion from corporate performance net of input costs: Although year-on-year sales growth was 16.1 percent, the corre- sponding material expense went up by a lesser increment of only 15.6 percent. This boosted value added by EUR 727.4 million. Value added was also pushed up by higher operating earnings, but this positive effect was completely cancelled out by an equal increase in operating expenses. An increase in depreciation, amortization and impairments, especially in the HOCHTIEF Asia Pacific and HOCHTIEF Americas divisions, also reduced value added, as did a drop in net income from participating interests compared with the prior year. This was primarily attributable to positive extraordinary items in fiscal 2007, consisting of the special dividend at Sydney Airport and the remeasurement, required under the corporate tax reform in Germany, of deferred tax items recognized on accounting for Hamburg Airport using the equity method. In addition, impairments were recognized in the HOCHTIEF Asia Pacific division in 2008 on listed companies in the business portfolio.
As in previous years, the largest share of value added, some 82 percent, was distributed to employees. The share dis- tributed to lenders increased in 2008 due to new borrow- ing to finance our substantially increased business volume and the high level of capital expenditure. In addition, we took the precaution of supplementing liquidity reserves by further drawing on our available credit facilities. The de- crease in the share distributed to minority shareholders was primarily attributable to lower earnings contributions from
the Leighton Group and airport holdings compared with 2007. The Executive Board proposal for the use of net profit provides for a further rise in the dividend for fiscal 2008 of EUR 1.40 per no-par-value share.
Despite this dividend increase of almost eight percent, the total dividend to shareholders remains at around the same level as in 2007, thanks to HOCHTIEF’s repurchase of almost ten percent of its own shares concluded in 2008. The tax expense, constituting the proportion of value added distrib- uted to public authorities, increased due to higher deferred tax items arising from temporary differences. Net value added distributed to HOCHTIEF represents the difference between consolidated net profit and dividends paid to shareholders.
*The total dividend amount stated for 2008 is based on the dividend of EUR 1.40 per no-par-value share proposed by the Executive Board and the number of shares in circu- lation on December 31, 2008.
6RXUFHVRIYDOXHDGGHG 2007
EUR million % EUR million %
Sales 19,103.0 98.1 16,451.8 98.6
Changes in inventories 0.0 0.0 (0.2) –
Other operating income 375.9 1.9 230.8 1.4
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Materials (14,250.6) 73.2 (12,326.8) 73.9
Other operating expenses (1,259.7) 6.5 (1,113.4) 6.7
Other investment expenses (22.7) 0.1 (9.2) 0.0
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Investment and interest income 117.6 0.6 130.7 0.8
Net income from participating
interests 306.0 1.6 354.3 2.1
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Depreciation and amortization (392.3) 2.0 (312.5) 1.9
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6RXUFHVRIYDOXHDGGHG 2007
EUR million % EUR million %
Employees 3,261.8 82.0 2,798.7 82.2 Lenders 195.3 4.9 105.5 3.1 Minority shareholders 167.1 4.2 200.3 5.9 HOCHTIEF shareholders* 88.2 2.2 90.9 2.7 Public authorities 177.9 4.5 160.3 4.7 HOCHTIEF 86.9 2.2 49.8 1.4 1HWYDOXHDGGHG