Alternative performance metrics (APM)

Solvay measures its financial performance using alternative performance metrics, which can be found below. Unless otherwise stated, 2016 and 2017 data are presented on a restated basis, after discontinuation of Acetow, Vinythai and Polyamide. Solvay believes that these measurements are useful for analyzing and explaining changes and trends in its historical results of operations, as they allow performance to be compared on a consistent basis.

• Tax rate = Income taxes / (Result before taxes – Earnings from associates & joint ventures – Interests & realized foreign exchange results on the RusVinyl joint venture). The reason for the adjustment made to the denominator regarding associates and joint ventures is that these contributions are already net of income taxes.
• Research & Innovation measures the total cash effort in research and innovation, regardless of whether the costs were expensed or capitalized. It consists of research & development costs from the income statement before netting of related subsidies and royalties, and where depreciation and amortization are replaced by related capital expenditure. Research & innovation intensity is the ratio of research & innovation to net sales.
• Free Cash Flow measures cash flow from operating activities, net of investments. It excludes any M&A or financing related activities, but includes elements like dividends from associates and joint ventures, pensions, and restructuring costs. It is defined as cash flow from operating activities (excluding cash flows from expenses incurred in connection with acquisitions of subsidiaries) and cash flow from investing activities (excluding cash flows from or related to acquisitions and disposals of subsidiaries and other investments, and excluding loans to associates and non-consolidated investments, as well as related tax elements and recognition of factored receivables).
• Capital expenditure (capex) is cash paid for the acquisition of tangible and intangible assets.
• Cash conversion is a ratio used to measure the conversion of EBITDA into cash. It is defined as (Underlying EBITDA + Capex from continuing operations) / Underlying EBITDA.
• Net working capital includes inventories, trade receivables and other current receivables, netted with trade payables and other current liabilities.
• (IFRS) net debt = Non-current financial debt + Current financial debt – Cash & cash equivalents – Other financial instrument receivables. Underlying net debt represents the Solvay share view of debt, reclassifying as debt 100% of the hybrid perpetual bonds, classified as equity under IFRS. Leverage ratio = Net debt / Underlying EBITDA of last 12 months. Underlying leverage ratio = Underlying net debt / Underlying EBITDA of last 12 months.
• Cash Flow Return On Investment measures the cash returns of Solvay’s business activities. Movements in CFROI levels are relevant indicators for showing whether economic value is being added, though it is accepted that this measure cannot be benchmarked or compared with industry peers. The definition uses a reasonable estimate of the replacement cost of assets and avoids accounting distortions, e.g. for impairments. It is calculated as the ratio between recurring cash flow and invested capital, where: 
  • Recurring cash flow = Underlying EBITDA + Dividends from associates and joint ventures – Earnings from associates and joint ventures + Recurring capex + Recurring income taxes;
  • Invested capital = Replacement value of goodwill & fixed assets + Net working capital + Carrying amount of associates and joint ventures;
  • recurring capex is normalized at 2% of the replacement value of fixed assets net of goodwill values
  • Recurring income tax is normalized at 30% of (Underlying EBIT – Earnings from associates and joint ventures)