Bertelsmann’s primary objective is continuous growth of the company’s value through a sustained increase in profitability. In order to manage the Group, Bertelsmann has been using a value-oriented management system for many years, which focuses on revenues, operating earnings and optimum capital investment. For formal reasons, Bertelsmann makes a distinction between strictly defined and broadly defined operational performance indicators.

Strictly defined operational performance indicators, including revenues, Operating EBITDA and Bertelsmann Value Added (BVA) , are used to directly assess current business performance and are correspondingly used in the outlook. These are distinguished from performance indicators used in the broader sense, which are partially derived from the above-mentioned indicators or are strongly influenced by these. These include the EBITDA margin and the cash conversion rate. The financial management system, with defined internal financing targets, is also part of the broadly defined value-oriented management system. Details of the expected development of performance indicators used in the broader sense are provided as additional information and are not included in the outlook.

Strictly Defined Operational Performance Indicators

In order to control and manage the Group, Bertelsmann uses revenues, operating EBITDA and BVA as performance indicators. Revenue is used as a growth indicator of businesses. In financial year 2014, Group revenues rose 3.1 percent to €16.7 billion (previous year: €16.2 billion). In view of the Bertelsmann Group’s growth strategy and the associated expansion of its investment activity, operating EBITDA has been used as a performance indicator since the start of the 2014 financial year for determining the profitability of the operating businesses. Operating EBITDA is determined as earnings before interest, tax, depreciation and amortization and is adjusted for special items. This makes it a meaningful performance indicator for determining a sustainable operating result. In the reporting period, operating EBITDA of €2,374 million was above the previous year’s high level (previous year: €2,311 million).

Bertelsmann uses BVA for assessing the profitability of operations and return on invested capital. BVA measures the profit realized above and beyond the appropriate return on invested capital. This form of value orientation is reflected in strategic investment, portfolio planning and the management of Group operations and, together with qualitative criteria, forms the basis for measuring the variable portion of management compensation. BVA is calculated as the difference between net operating profit after tax (NOPAT) and the cost of capital. NOPAT is calculated on the basis of operating EBITDA and is used, in turn, to calculate BVA. NOPAT is calculated on the basis of operating EBITDA and is used, in turn, to calculate BVA. The NOPAT is determined by firstly deducting depreciation, amortization and impairment losses and adjusting for special items. After subsequent modifications and deduction of a flat 33 percent tax the resulting figure is the NOPAT. Cost of capital is the product of the weighted average cost of capital (WACC) and the level of capital invested. The uniform WACC after taxes is 8 percent. Invested capital is calculated on the basis of the Group’s operating assets less non-interest-bearing operating liabilities. The present value of operating leases is also taken into account when calculating the invested capital. BVA in financial year 2014 fell to €188 million compared with the previous year’s figure of €283 million, despite the improved operating earnings performance overall. This development stems in particular from the acquisitions made in the reporting period as well as from the first-time inclusion for the full year of the transactions from the previous year, which resulted in an increase in invested capital. The compensating effects of earnings contributions from the acquired businesses are only expected to be felt in subsequent years as a result of their growth profile. The BVA at RTL Group was slightly down on the previous year. The decline in BVA at Penguin Random House is primarily attributable to the increase in invested capital. The BVA of Gruner + Jahr was reduced by a lower earnings contribution in the reporting period. At Arvato the BVA was adversely impacted by the declining earnings and simultaneous increase in invested capital. The BVA of Be Printers improved slightly.

BVA in € millions
Strictly Defined Operational Performance Indicator

BVA in € millions<sup>1)</sup>

Cash Conversion Rate in percent1)
Broadly Defined Performance Indicator

Cash Conversion Rate in percent<sup>1)</sup>

Broadly Defined Performance Indicators

In order to assess business development, other performance indicators are used that are partially derived from revenues and operating EBITDA or are strongly influenced by these figures.

The cash conversion rate serves as a measure of cash generated from business activities and is calculated as the ratio of operating free cash flow to operating EBIT. Operating free cash flow does not reflect interest, tax or dividend payments to non-controlling interests, is lowered by operating investments such as replacement and expansion investments as well as changes in working capital and is adjusted for special items. The Group aims to maintain a cash conversion rate of 90 to 100 percent as a long-term average. The cash conversion rate in financial year 2014 was 97 percent (previous year: 104 percent) and therefore within the target corridor.

The EBITDA margin is calculated as the ratio of operating EBITDA to revenues, which is used as an additional criterion for assessing the business performance. In the financial year 2014, the EBITDA margin of 14.2 percent was in line with the previous year’s high level of 14.3 percent.

Bertelsmann’s financial management and controlling system is defined by the internal financial targets outlined in the “Net Assets and Financial Position” section. These financing principles are pursued in the management of the Group and are included in the broadly defined value-oriented management system.

The nonfinancial performance indicators (employees, corporate responsibility and innovations) are not included in the broadly defined value-oriented management system. As they can only be measured to a limited extent, it is not possible to make any clear quantifiable statements concerning interrelated effects and value increases. For this reason, the nonfinancial performance indicators are not used for the management of the Group.