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Troop Rally 2000 - North America

Chemicals

EVA in Chemicals
Kees van Zuijlen

Chemicals

Contents • What is EVA? • Time schedule • EVA in Chemicals • Expected benefits Chemicals .

EVA is not a substitute for . • Leadership • Innovation • Communication • Judgement • Integrity • Discipline • Smart ideas Chemicals . . .

. A management tool for creating value Chemicals .EVA is……….

Value creation is crucial Only if we produce profits above the cost of our capital we will be able to continue to: • Attract investor’s capital to make investments and acquisitions • Invest in our people to grow our business • Service our customers beyond expectations • Be a good citizen of society Chemicals .

What is an EVA system? An EVA system is a financial management system for • Measuring true economic profit • Making sound operational decisions • Rewarding employees who create value Chemicals .

EVA measures true economic profit • EVA is the profit in excess of investors’ required returns EVA (Net Operating Profit after Tax) NOPAT (Economic Value Added) (Capital x cost of capital) Capital Charge Chemicals .

EVA at Akzo Nobel 1995 1996 1997 1998 1999 NOPAT Average Capital * Cost of Capital .Capital Charge = EVA EVA improvement 735 5221 9% 470 265 680 5390 485 195 -70 824 5814 523 301 106 861 6047 544 317 16 1019 6560 590 429 112 Chemicals .

Introduction of EVA throughout Akzo Nobel 2001 EVA operational throughout Akzo Nobel Chemicals .Time schedule 1999 Phase 1 .Decision on EVA implementation .Pilots fully on EVA system .Pilots at three BU’s 2000 Phase 2 .

EVA in Chemicals • Pilot: Surface Chemistry • All BU’s have EVA team(s) in place • Implementation of management tools in progress • Target discussions • Reporting Chemicals .

Akzo Nobel’s EVA definition Five adjustments are made to accounting numbers to better reflect economic performance: • Unusual items – Capitalization and amortization (5 years) and amortization of value of commitments • Major off-balance sheet projects – Capitalization • Non-consolidated joint ventures – Taking into account total capital base (equity and loans) • Project R & D – Capitalization option for projects. according to threshold rules • Current assets – cash is excluded from BU capital definition Chemicals .

changed when difference is more than 1% Chemicals . • Goodwill – No adjustment because of change in accounting principles • Cost of capital is 9% – re-evaluated yearly.Akzo Nobel’s EVA definition • Major Investment Relief – Relief for major investments/ acquisitions/ R&D projects etc.

Target setting for Akzo Nobel. Groups and BU’s Methodology is the same. but starting point (total value) is different: • Akzo Nobel: share price • Groups: intrinsic value based on peer analysis • BU’s: intrinsic value based on group references The sum of the BU targets equals Akzo Nobel’s target Chemicals .

not planned performance EVA Multi-year targets Time Chemicals .Targets Stretch plan = TOP = budget Performance is measured against target.

EVA reporting • Monthly/quarterly reports • RF/TOP • MIAC/EVA Chemicals .

MIAC/EVA • Operating income / NOPAT • Invested capital / EVA capital Chemicals .

Investment projects • Structural profitability (ROI/EVA) • EVA and DCF • EVA cut-off rate? • EVAluator in progress Chemicals .

Expected benefits from the EVA system More value creation: • Understandable measure of value throughout the company • Cost of capital is always taken into account • Targets are less subjective as they are derived form market expectations • Variable pay is truly variable • A longer term focus is created by making part of the variable pay dependent on future performance and by fixing the target for three years Chemicals .

North America Chemicals .Troop Rally 2000 .