Fit4 2010: Performance
Fit4 2010 defines the targets and metrics that measure our performance. Our overarching aim remains the same: to achieve profitable growth and further increase the value of our Company as a whole. In addition to pushing sales growth and profitability at our individual Groups, we’re also focusing on increasing our return on capital employed, improving our long-term cash position and optimizing our capital structure.
The challenges posed by the two megatrends urbanization and demographic change are driving customer demand. Siemens is tapping the resulting business opportunities – something we’re better positioned to do than virtually any other company in the world – in order to continue growing twice as fast as the global economy.
To be sustainable, growth must be profitable. That’s why we’re aiming to match or exceed the profitability of our best competitors in all our operations. Although achieving our Fit4More target margin ranges by the second quarter of fiscal 2007 was a key step in this direction, some of our businesses still have potential for further improvement. As a result, we’ve raised the target margin ranges for the seven Groups Automation and Drives (A&D), Industrial Solutions and Services (I&S), Power Generation (PG), Power Transmission and Distribution (PTD), Medical Solutions (Med), OSRAM and Siemens Financial Services (SFS). Some of these Groups are profiting from very positive market environments and the successful integration of recent acquisitions. We’ve also raised the target margin range for an eighth Group: Siemens IT Solutions and Services (SIS), whose restructuring is now complete.
Our recent acquisitions of Diagnostic Products Corporation (DPC), Bayer Diagnostics and, most recently, Dade Behring have doubled the overall market served by the Medical Solutions Group to €57 billion and given the Group access to further attractive market segments. That’s why we’ve we raised Med's target margin range for Med to 14 – 17%.
However, to be truly successful, we must do more than generate profitable growth. What’s equally important, we must also ensure that we’re achieving a satisfactory ratio between our earnings and the capital we use in our business activities, that these activities generate a sufficient amount of cash and that we have an excellent capital structure.
To measure the relation between our earnings and the capital our businesses use, we’ve adopted the metric return on capital employed (ROCE). ROCE, which is commonly used to compare the performance of one business with that of another, can be calculated directly from the figures provided in a company’s financial statements: It’s the ratio of income before interest expense to capital employed. And there’s competition here, too. Most or our main competitors have a better ROCE than we do. To close the gap, we’ve set an ROCE target of 14 – 16%.
To determine how much cash our activities are generating, we’re applying the metric cash conversion rate (CCR), which is the ratio of free cash flow from continuing operations to income from continuing operations. We’ve set a CCR target of “one minus the Company’s growth rate.” This target has been adjusted for our growth rate because growth normally requires higher investments – for example, expenditures for new production capacities and increased inventories to meet anticipated increases in demand – and higher net working capital. The targets we’ve set reflect our goal of achieving capital-efficient growth.
For the first time, we’re also setting a capital structure target: to achieve a ratio of adjusted industrial net debt to EBITDA of 0.8 – 1.0 by 2010. This step, which will enable us to optimize our capital structure, rounds off our new system of financial targets.