Troop Rally 2000 - North America

Chemicals

EVA in Chemicals
Kees van Zuijlen

Chemicals

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

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EVA is not a substitute for . . .

Leadership Innovation Communication Judgement Integrity Discipline Smart ideas

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EVA is..

A management tool for creating value

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Value creation is crucial

Only if we produce

profits above the cost of our capital

we will be able to continue to:

Attract investors 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
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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

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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

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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
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Time schedule
1999 Phase 1

- Decision on EVA implementation

- Pilots at three BUs 2000 Phase 2

- Pilots fully on EVA system

- Introduction of EVA throughout Akzo Nobel 2001 EVA operational throughout Akzo Nobel

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EVA in Chemicals
Pilot: Surface Chemistry All BUs have EVA team(s) in place Implementation of management tools in
progress

Target discussions Reporting

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Akzo Nobels 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

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Akzo Nobels EVA definition

Major Investment Relief
Relief

for major investments/ acquisitions/ R&D

projects etc.

Goodwill
No

adjustment because of change in accounting

principles

Cost of capital is 9%
re-evaluated

yearly, changed when difference is

more than 1%
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Target setting for Akzo Nobel, Groups and BUs

Methodology is the same, but starting point (total

value) is different:

Akzo Nobel: share price Groups: intrinsic value based on peer analysis BUs: intrinsic value based on group references
The sum of the BU targets equals Akzo Nobels target

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Targets

Stretch plan = TOP = budget

Performance is measured against target, not planned performance

EVA

Multi-year targets

Time

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EVA reporting
Monthly/quarterly reports RF/TOP MIAC/EVA

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MIAC/EVA
Operating income / NOPAT Invested capital / EVA capital

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

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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

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Troop Rally 2000 - North America

Chemicals