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 compensation system. By building targets for value created directly into the components of performance-linked compensation, we keep management motivation closely aligned with Group and shareholder interests.
If RONA exceeds weighted average cost of capital (WACC), value created is positive, which means the Group is generating 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 investment. Return is defined for this purpose as operating earnings (EBITA, shown in the Operational Statement of Earnings) plus interest income from the Group's financial assets.
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 (shareholders' 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.
| (EUR million) | 2008 | 2007 |
|---|---|---|
| Operating earnings (EBITA)* | 676.1 | 539.5 |
| + Interest income** | 43.2 | 72.2 |
| Return | 719.3 | 611.7 |
| 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 |
| Average net assets | 5,331.6 | 4,107.2 |
| Return on net assets (RONA) | 13.5 | 14.9 |
| Value created (absolute) | 186.6 | 201.3 |
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 increase 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 sustained strategy geared to value growth.
The HOCHTIEF Americas division once again comfortably 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 generated 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 because 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.
HOCHTIEF Asia Pacific 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 combined with the increase in net assets.
The HOCHTIEF Concessions 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 corporate tax reform, a special dividend from Sydney Airport and success fees for Budapest Airport. As a result of its strong earnings, HOCHTIEF Airport once again significantly exceeded its cost of capital with RONA of 14.2 percent (2007: 22.1 percent). Net assets grew mostly as a result of the purchase of the stake in Budapest Airport
| Divisions | Return | Net Assets | RONA | WACC | Value created | Value created |
|---|---|---|---|---|---|---|
|
2008 (EUR million) |
2008 (EUR million) |
2008 (in %) |
2008 (in %) |
2008 (EUR million) |
2007 (EUR million) |
|
| HOCHTIEF Americas | 90.2 | 474.0 | 19.0 | 14.1 | 23.2 | 27.8 |
| HOCHTIEF Asia Pacific | 435.3 | 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 |
| Group | 719.3 | 5,331.6 | 13.5 | 10.0 | 186.6 | 201.3 |
HOCHTIEF PPP Solutions likewise exceeds its required minimum return with RONA of 13 percent (2007: 14.9 percent). 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 proportionately faster than return.
HOCHTIEF Europe achieved RONA of 0.4 percent (2007: minus 21.2 percent). Although value created is still negative, it represents a marked improvement on the prior year. The upward trend in new orders and the initiated restructuring in German building construction delivered a sharp boost to earnings. Our international activities also contributed to stronger earnings growth. We expect to have value added back in positive figures by the medium term.
HOCHTIEF Real Estate significantly improved on its prioryear earnings with strong rentals on real estate developments 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.
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.