We pursue a corporate strategy of sustainable earnings-based growth, with the aim of achieving a steady increase in corporate value. To measure the medium-term and long-term financial success of this value-based management strategy, we use return on capital employed (ROCE) as our key target.

When we acquired The BOC Group, we redefined ROCE and applied the new definition to the 2006 financial year. The revised definition takes account of the various effects of the acquisition on the ROCE performance indicator. On the one hand, capital invested increased significantly due to the acquisition. On the other hand, earnings were adversely affected by the amortisation of fair value adjustments identified in the course of the purchase price allocation. This reduces the return on capital, although the operating performance of the company has not been changed as a result of the identification of fair value adjustments and their amortisation. To ensure that the operating performance of The Linde Group is transparent and disclosed in a way which is comparable to the disclosure of our major competitors, we have eliminated the amortisation of fair value adjustments identified in the course of the BOC purchase price allocation from our ROCE calculation.

To achieve sustainable and successful growth in The Linde Group, we work together with some customers on the basis of joint venture business models. So that the current joint ventures, which form a major operational component of the Gases Division, are included in the management ratios and performance indicators, we have added our share of the income from associates and joint ventures, based on the respective earnings after taxes on income, to the figure for EBIT in the new ROCE calculation.

The calculation of the key target ROCE for The Linde Group can be summarised as follows: (see graphic to the right above).

1 Each calculated on the basis of the average of the figures at the balance sheet date for the current year and previous year.

To manage our operating business and indicate our performance, we use not only ROCE as a management tool, but also other key figures such as free cash flow before financing activities, operating earnings before interest, tax, depreciation and amortisation (adjusted EBITDA (Glossary)), operating earnings before interest and tax (EBIT) and earnings per share (EPS). We adjust both EBIT and EPS for the amortisation of the fair value adjustments identified in the course of the purchase price allocation. A reconciliation between the reported figures for EBIT and EPS and the adjusted figures is included in the Notes to the Group financial statements (see Note [41]). The calculation of the variable remuneration of our management is also based on these figures.

The Group consists of the Gases Division, the Engineering Division and Other Activities. In the Gases Division, responsibilities are linked directly to local value creation. Therefore, the managers in the nine Regional Business Units (RBUs) within the four operating segments, Western Europe, the Americas, Asia & Eastern Europe and South Pacific & Africa, are responsible for the operating business. The capital expenditure process is managed centrally. This structure means that we take into account the importance of local and regional market conditions in the gases business.

Responsibility for the Tonnage (on-site) and Healthcare (medical gases) businesses is also assumed by a global centralised function. In the on-site business, this enables us to take the international orientation of our major customers into consideration. In the Healthcare business, the additional centralisation allows us to respond more accurately and systematically to the specific requirements of this increasingly regulated sector.

When we reflect this operating model in the allocation of responsibilities to members of the Group’s Executive Board, we ensure that the respective strengths and skills of the Board members are effectively exploited at both regional and product levels.

Organisational structure of The Linde Group. The Group consists of the Gases Division, the Engineering Division and Other Activities. Within the Gases Division, there are four operating segments: Western Europe, the Americas, Asia & Eastern Europe and South Pacific & Africa. Other Activities comprises Gist, our logistics services business, and our subsidiary Cleaning Enterprises (environmentally friendly dry-cleaning under the brand name FRED BUTLER®).