Key indicators – performance and portfolio
These long-term financial targets determine the scope of our key financial performance indicators. The values for these indicators for the last three reporting years are as follows:
| 2007 | 2006 | 2005 | |
|---|---|---|---|
| Underlying sales growth (%) | 5.5 | 3.8 | 3.4 |
| Operating margin (%) | 13.1 | 13.6 | 13.2 |
| Ungeared free cash flow (€ billion) | 3.8 | 4.2 | 4.0 |
| Return on invested capital (%) | 12.7 | 14.6 | 12.5 |
| Total shareholder return (ranking) | 8 | 13 | 14 |
Underlying sales growth (USG), ungeared free cash flow (UFCF) and return on invested capital (ROIC) are not recognised measures under IFRS. The IFRS measure most comparable with USG is turnover. In our Financial Review we reconcile USG with changes in turnover. There is no IFRS measure directly comparable with either UFCF or ROIC. In our Financial Review we reconcile ROIC to net profit, and UFCF to both net profit and cash flow from operations. The values of turnover, net profit and cash flow from operating activities for the last three reporting years are as follows:
| € million 2007 |
€ million 2006 |
€ million 2005 |
|
|---|---|---|---|
| Turnover | 40 187 | 39 642 | 38 401 |
| Net profit | 4 136 | 5 015 | 3 975 |
| Cash flow from operating activities | 5 188 | 5 574 | 5 924 |
In 2007, we set out simultaneously to deliver a higher and more consistent level of underlying sales growth in combination with an underlying improvement in operating margin. Underlying sales growth has indeed shown a marked increase to 5.5% in 2007, driven by better innovation rolled out faster to more countries and better execution in local markets.
We also achieved an underlying improvement in operating margin of 0.2 percentage points in 2007, as the combination of volume leverage, higher prices, cost savings and mix improvement successfully offset a sharp rise in commodity costs and other inflation.
Our reported operating margin declined by 0.5 percentage points, due to a significantly higher level of restructuring charges related to our plans to accelerate change, which were announced in August 2007. These plans aim to deliver a reduction in our annual cost base by around €1.5 billion by the end of 2010, compared with our 2006 cost base, through the creation of multi-country organisations (MCOs), the closure or streamlining of 50-60 factories, and a further reduction in regional and global overheads.
Ungeared free cash flow was €3.8 billion, which was €0.4 billion lower than a year earlier, including the effect of the higher cash restructuring costs and increased capital expenditure. Return on invested capital was 12.7% in 2007. This represented an improvement from 11.5% in 2006, when adjusted for the profit on the disposal of frozen foods. Before allowing for this adjustment, return on invested capital in 2006 was 14.6%.
On our three-year average Total Shareholder Return key performance measure, which forms part of the basis for top management remuneration, we remained just outside the top third of our peer group, although we further improved our position to the 8th place out of 21 companies.
Further information about these measures, including definitions and, where appropriate, reconciliation to GAAP measures, can be found in our Financial Review.
In addition to these financial indicators, we track other measures in support of our strategic goals. We believe that the share of our business that is generated in developing and emerging (D&E) markets, and the proportion of our turnover that is generated by our top 25 brands are particularly relevant. In the latter context we group together brands that have a common consumer proposition and are supported by common innovation programmes, although in some cases the brand names may vary between countries. The results for these measures for the last three reporting years are as follows:
| 2007 | 2006 | 2005 | |
|---|---|---|---|
| Share of turnover in D&E markets (%) | 44 | 42 | 40 |
| Share of turnover in top 25 brands (%) | 73 | 73 | 72 |
Our D&E businesses continue to show strong growth, in Asia, Africa, Central and Eastern Europe and Latin America, and now make up 44% of our total turnover. Our D&E strategy is focused on leveraging and further strengthening our existing leading positions in many D&E markets, such as India and Brazil, as well as building our brands and business in countries where we currently have a relatively smaller presence, notably China and Russia. Our sustained growth is reflecting the strength of our D&E business model which is characterised by a differentiated portfolio of strong global and regional brands addressing the needs of the different income groups, high quality innovation and communication, scale and depth in distribution, and an excellent track record and reputation for developing management talent. Our focus on our best global and regional brands, with increased investment in advertising and faster roll-out of innovation, has resulted in a focused portfolio, with 12 brands having a worldwide turnover in excess of €1 billion and our top 25 brands collectively delivering 73% of our turnover in 2007.
We also monitor the development of our brands through market information that gives us insights into our leading positions versus our direct competitors. In our section on Operating environment we indicate the product areas in which we have leading or key strategic positions.
