Unilever 2008 Annual Report Download - page 23

About Unilever
20 Unilever Annual Report and Accounts 2008
Report of the Directors
Our business and our strategy
Unilever is one of the world’s leading suppliers of fast moving
consumer goods. We aim to add Vitality to Life through meeting
everyday consumer needs for nutrition, hygiene and personal care
with products that help people to feel good, look good and get
more out of life. Unilever is a global business which achieves close
to half of its turnover in developing and emerging markets in
Asia, Africa, Central & Eastern Europe and Latin America.
Unilever’s portfolio includes such well-known brands as Knorr,
Lipton, Hellmann’s, Magnum, Omo, Dove, Lux and Axe/Lynx.
In 2008 we continued to focus on investing resources in markets
that are attractive and where we have competitive advantage,
notably Vitality (which we discuss in more detail on pages 9 to
17), Developing and Emerging (D&E) markets and personal care.
These higher growth areas have offered excellent opportunities
for us to develop our business performance and deliver more
shareholder value. At the same time, we continue to seek to
enhance our profitability and productivity through our
transformation agenda, the key features of which are the
simplification of our structure under the ‘One Unilever’
programme, the strengthening of our brand portfolio through
acquisitions and disposals, and the rationalisation of our supply
chain.
Our long-term ambition is to be in the top third of a group of
21 fast moving consumer goods companies in terms of total
shareholder return on a three-year basis. A list of companies
included in our peer group is set out on page 43.
Key indicators – performance and portfolio
We have defined the following five key financial performance
indicators for our business:
2008 2007 2006
Underlying sales growth (%) 7.4 5.5 3.8
Operating margin (%) 17.7 13.1 13.6
Ungeared free cash flow (€ billion) 3.2 3.8 4.2
Return on invested capital (%) 15.7 12.7 14.6
Total shareholder return (ranking) 9813
Underlying sales growth (USG) is defined as the percentage
increase in turnover, adjusted for the impact of acquisitions and
disposals and exchange rate fluctuations. In 2008, underlying
sales growth increased from 5.5% to 7.4%, driven by pricing
action in response to unprecedented increases in commodity
costs.
Operating margin for 2008 improved from 13.1% to 17.7%,
boosted by the net impact of profits on disposals, restructuring
charges and other one-off items. Before these items the
underlying improvement in operating margin in 2008 was 0.1
percentage points.
Ungeared free cash flow (UFCF) is defined as the cash flow from
operating activities less net capital expenditure, pension charges,
share-based compensation costs and tax. A more comprehensive
definition is given on page 41. In 2008, UFCF was €3.2 billion,
which was €0.6 billion lower than a year earlier, with the
underlying growth in operating profit being offset by business
disposals and adverse currency movements. It also reflected
higher restructuring costs, additional investment in capital
expenditure and higher tax rates. It included a working capital
increase of only €0.2 billion, which we see as a good achievement
in the light of the unprecedented commodity cost increases and
related pricing actions.
Return on invested capital (ROIC) is defined as profit after tax
(excluding finance and net impairment charges) divided by the
average invested capital. A more comprehensive definition is
given on page 42. In 2008, ROIC was 15.7%, boosted from
12.7% in 2007 by profits on business disposals. Excluding profits
on disposals, ROIC was 11.2%, broadly in line with 2007 on a
comparable basis.
Within our peer group of 21 companies, our relative Total
Shareholder Return over a three-year period was 9th in 2008. This
measure forms part of the basis for the long-term remuneration
of top management.
Underlying sales growth, ungeared free cash flow and return on
invested capital are not recognised measures under IFRS. The IFRS
measure most comparable with USG is turnover. In our Financial
Review on page 43 we reconcile USG with changes in turnover.
There is no IFRS measure directly comparable with either UFCF or
ROIC. In our Financial Review on pages 41 and 42 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 € million € million
2008 2007 2006
Turnover 40 523 40 187 39 642
Net profit 5 285 4 136 5 015
Cash flow from operating activities 5 326 5 188 5 574
Further information about these measures, including definitions
and, where appropriate, reconciliation to GAAP measures, can be
found in our Financial Review starting on page 40.
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. For the latter measure
we group together brands that have common consumer profiles
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:
2008 2007 2006
Share of turnover in D&E markets (%) 47 44 42
Share of turnover in top 25 brands (%) 73 73 73