Internal control system

Responsible corporate management based on transparent performance indicators

The DEUTZ Group defines its budget targets and medium-term corporate targets using selected key performance indicators (KPIs). In order to increase profitability and achieve sustained growth, we manage the Group on the basis of the following financial performance indicators:

Financial performance indicators

       
    2018 2017
Revenue growth 1) % 20.3 17.4
EBIT margin (before exceptional items) 1) % 4.6 2.7 2)
Working capital ratio (average)  1) % 15.8 13.4
ROCE (before exceptional items) 1) % 10.3 5.3 2)
R&D ratio 1) % 4.8 4.5
Free cash flow 1) € million 14.5 82.5
1) These KPIs are alternative performance measures that are not defined in the International Financial Reporting Standards (IFRS).
A reconciliation of these KPIs to the amounts recognised in the financial statements is provided below.
2) Adjusted as a result of the write-downs on the DEUTZ Dalian joint venture.

Revenue growth

DEUTZ strives to steadily increase revenue as the basis for the profitable growth of the Company. The level and growth of revenue is determined on a monthly basis, broken down by product group, application segment and region. This data is provided to senior management promptly so that it can react quickly to changes as they materialise.

EBIT margin (before exceptional items)

The main key performance indicator that we use to manage the Company’s operating performance is the EBIT margin before exceptional items. It is based on the Group’s earnings before interest and tax (EBIT). The EBIT figure is then adjusted for exceptional items and calculated as a percentage of revenue. We define exceptional items as significant income generated or expenses incurred outside the scope of the Company’s ordinary business activities that are unlikely to recur. Adjusting for exceptional items enables a more accurate comparison of the Company’s operating performance over time. The EBIT margin before exceptional items is, like revenue growth, calculated monthly and presented to senior management as part of internal reporting. Whereas there were no exceptional items in 2018, they had totalled €104.1 million in 2017.

Working capital ratio (average)

We manage the Company’s tied-up capital using the average working capital ratio. This is the ratio of average working capital over the past four quarters to revenue for the preceding twelve months. Working capital comprises inventories plus trade receivables less trade payables. Along with revenue growth and the EBIT margin (before exceptional items), this key figure is calculated monthly and presented to senior management.

ROCE (before exceptional items)

The return on the capital employed in the Group is measured and managed on an annual basis using the key figure ROCE (before exceptional items). This is calculated as follows:

ROCE

€ million    
  2018 2017 1)
Total assets 1,249.3 1,198.2
Cash and cash equivalents –132.8 –143.8
Trade payables –214.6 –207.5
Other current and non-current liabilities –90.7 –71.3
Capital employed 811.2 775.6
Capital employed (average for the year) 2) 793.2 755.4
EBIT (before exceptional items) 82.0 39.7
ROCE (before exceptional items) 10.3 % 5.3 %
1) Adjusted as a result of the write-downs on the DEUTZ Dalian joint venture.
2) Average of the opening and closing balances.

R&D ratio

As a technology-focused company, we consider the R&D ratio to be one of the most significant performance indicators in our internal management system. It is the ratio of research and development expenditure (after reimbursements) to revenue in the period in question. The R&D ratio is calculated at least once a quarter and is reported to senior management.

Free cash flow

The DEUTZ Group uses free cash flow as its main performance indicator for managing liquidity. It comprises net cash provided by, and used for, the operating activities and investing activities of the Group during the period in question less interest payments in connection with financing activities. We can thus show what cash flow generated in the relevant year is available to the Company, e.g. for repaying liabilities or paying a possible dividend to shareholders. Free cash flow is reported to senior management at least once a quarter.

Based on these performance indicators, DEUTZ has set up an early warning system in order to be proactive and respond promptly. At the same time, we operate a sound system of causal analysis to ensure that we minimise risks and make the most of opportunities. Three times a year we produce an annual forecast for all key performance indicators. This enables us to ensure transparency with regard to our business performance, benefiting both the Group and our stakeholders.

In addition to the financial performance indicators which form part of the management system described above, we also employ a range of other parameters to measure our economic performance. These include, but are not limited to, new orders received, revenue and unit sales on the income side, the working capital as at the reporting date with regard to tied-up capital, and earnings before interest, taxes, depreciation and amortisation (EBITDA). Moreover, the Group net income and the DEUTZ AG statutory income in accordance with the German Commercial Code are significant factors for us as regards dividend payments.