Michelin couv courteGB

Economic
performance target
Since 1993, Michelin makes a yearly assessment of its economic
performance in relation to an internal high target hinging on
value creation. To determine whether the Group is creating value,
the actual risk adjusted return on capital employed (actual
RAROC) corresponding to the cost of economic capital and debt),
is compared with target RAROC. To this effect, the Group relies
on the “Free Cash Flow to Economic Capital” method. The year
2004 saw for the first time since 1993 a refining of the method
used. This has to do with the accounting of employee benefit
obligations, since the amounts involved have substantially grown
over the years. The related provisions, which used to be charged
to our working capital requirements, are now treated as debt.
As a result, we continue to calculate the objective rate based on
100% of shareholders equity for goodwill and intangible assets
and 50% of shareholders equity for tangible and financial assets;
Strategy • Fundamentals • Businesses • Résultats Earnings
Economic performance target
but we now allocate 10% of Shareholders equity to inventory
and 8% to trade payables (compared with 25% to cover one
hundred per cent of working capital requirements as before).
Moreover, interest charges in connection with these provisions
(reversal cost) are now recognized in the effective result.
The other procedures are unchanged and we set forth below
the calculations using the previous method to show the impact,
which appears to be limited, induced by the change. With 15%
after tax expressed in euros, the Group has retained a high level
of capital yield requirement. After taking into account local differences
concerning the cost of funds and risk in the countries
where the Group operates, the average after-tax rate required
to remunerate Shareholders funds is of 16.3% for 2004 using
the new method (and 16.5% for 2004 using the old method
and 15.7% for 2003).
(in € milion) 2000 2001 2002 2003 2004 2004
OM NM
“Standard” Shareholders Funds
Average weighted
4,429.9 4,592.0 4,495.2 4,250.1 4,191.4 4,570.2
cost of Shareholders Funds 16.3% 16.0% 15.4% 15.7% 16.1% 15.9%
“Standard” Financial Debt 5,183.1 5,225.7 4,974.5 4,544.3 4,345.3 6,249.1
Average weighted cost of Coût debt 7.2% 6.1% 4.8% 4.3% 4.8% 4.5%
Capital invested 9,613.0 9,817.7 9,469.7 8,794.4 8,536.8 10,819.3
Objective rate 11.4% 10.7% 9.8% 9.8% 10.4% 9.3%
Net earnings after tax 438.4 313.9 614.15 328.9 527.2 527.2
Interest charge 358.2 350.7 283.4 244.4 235.4 365.2
Effective rate 8.3% 6.8% 9.5% 6.5% 8.9% 8.3%
In 2004, using the new method, the effective rate was 1 point below the target rate, versus a 1.4 point spread using the previous
method.
In as much as the rate of return on economic capital selected by the Group could appear somewhat arbitrary to some investors, the
following table shows – for information purposes – results of the Target RAROC for 2004 with a 12, 13 and 14% rate, based on the
weighted average cost of economic capital (euro base) of 15%.
Weighted average cost of economic Capital 12% 13% 14% 15%
Target RAROC 8.1% 8.5% 8.9% 9.3%
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