Unilever 2006 Annual Report Download - page 28

Financial review (continued)
Unilever Annual Report and Accounts 2006 25
Report of the Directors (continued)
Caution
Unilever cautions that, while UFCF and ROIC are widely used as
tools for investment analysis, they are not defined terms under
IFRS or US GAAP and therefore their definition should be carefully
reviewed and understood by investors. Investors should be aware
that their application may vary in practice and therefore these
measures may not be fully comparable between companies.
In particular:
• We recognise that the usefulness of UFCF and ROIC as
indicators of investment value is limited, as such measures
are based on historical information;
• UFCF and ROIC measures are not intended to be a substitute
for, or superior to, GAAP measures in the financial statements;
• The fact that ROIC is a ratio inherently limits its use, and
management uses ROIC only for the purposes discussed above.
The relevance and use of net profit for the year (being the most
relevant comparable GAAP measure) is clearly more pervasive;
and
• UFCF is not the residual cash available to pay dividends but
represents cash generated by the business and broadly available
to the providers of finance, both debt and equity.
Underlying sales growth
USG reflects the change in revenue from continuing operations at
constant rates of exchange, excluding the effects of acquisitions
and disposals. It is a measure that provides valuable additional
information on the underlying performance of the business.
In particular, it presents the organic growth of our business year
on year and is used internally as a coremeasure of sales
performance.
The reconciliation of USG to the GAAP measure turnover is as
follows:
2006 2005
vs 2005 vs 2004
Underlying sales growth (%) 3.8 3.4
Effect of acquisitions (%) 0.1 0.0
Effect of disposals (%) (0.8) (1.5)
Effect of exchange rates (%) 0.3 1.4
Turnover growth (%) 3.2 3.3
Ungeared free cash flow
Ungeared free cash flow (UFCF) expresses the generation of profit
by the business and how this is translated into cash, and thus
economic value. It is therefore not used as a liquidity measure
within Unilever. The movement in UFCF is used by Unilever to
measure progress against our longer-term value creation goals as
outlined to investors.
UFCF is cash flow from group operating activities, less capital
expenditure, less charges to operating profit for share-based
compensation and pensions, and less tax (adjusted to reflect
an ungeared position and, in 2006, for the impact on profit
on sales of frozen foods businesses), but before the financing
of pensions.
In 2006, UFCF was €4.2 billion (2005: €4.0 billion). The
reconciliation of UFCF to the GAAP measures net profit and
cash flow from operating activities is shown on page 26.
The tax charge used in determining UFCF can be either the
income statement tax charge or the actual cash taxes paid.
Our consistently applied definition uses the income statement
tax charge in order to eliminate the impact of volatility due to the
variable timing of payments around the year end. For 2006 the
income statement tax charge on this basis is materially impacted
by the tax effect of non-cash charges for the provision for
preference shares and certain other non-cash items. UFCF based
on actual cash tax paid would be €4.5 billion (2005: €3.7 billion).
Return on invested capital
Returnon invested capital (ROIC) expresses the returns generated
on capital invested in the Group. The progression of ROIC is used
by Unilever to measure progress against our longer-term value
creation goals outlined to investors.
ROIC is profit after tax but excluding net interest on net debt and
impairment of goodwill and indefinite-lived intangible assets both
net of tax, divided by average invested capital for the year.
Invested capital is the sum of property,plant and equipment and
other non-current investments, software and finite-lived intangible
assets, working capital, goodwill and indefinite-lived intangible
assets at gross book value and cumulative goodwill written off
directly to reserves under an earlier accounting policy.
In 2006, ROIC was 14.6% (2005: 12.5%). The reconciliation of
ROIC to the GAAP measure net profit is shown on page 26.
ROIC reported in 2005 and 2006 has been based on total
business profit, including profit on disposals. The impact on profit
after tax ofmaterial disposals was €1 170 million (2005: €458
million). ROIC excluding this impact is 11.5% (2005: 11.3%).