Unilever 2008 Annual Report Download - page 43

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Financial Review continued
40 Unilever Annual Report and Accounts 2008
Report of the Directors
Non-GAAP measures
Certain discussions and analyses set out in this Annual Report
and Accounts include measures which are not defined by
generally accepted accounting principles (GAAP) such as IFRS.
We believe this information, along with comparable GAAP
measurements, is useful to investors because it provides a
basis for measuring our operating performance, ability to retire
debt and invest in new business opportunities. Our management
uses these financial measures, along with the most directly
comparable GAAP financial measures, in evaluating our operating
performance and value creation. Non-GAAP financial measures
should not be considered in isolation from, or as a substitute for,
financial information presented in compliance with GAAP.
Non-GAAP financial measures as reported by us may not be
comparable with similarly titled amounts reported by other
companies.
In the following sections we set out our definitions of the
following non-GAAP measures and provide reconciliations to
relevant GAAP measures:
• Ungeared free cash flow;
• Return on invested capital;
• Underlying sales growth; and
• Net debt.
We set out ‘Measures of long-term value creation’ as an
introduction to the following section, in order to explain the
relevance of the above measures. At the end of this section we
summarise the impact on Total Shareholder Return (TSR) which is
a key metric.
Measures of long-term value creation
Unilever’s ambition for the creation of value for shareholders is
measured by Total Shareholder Return over a rolling three-year
period compared with a peer group of 20 other international
consumer goods companies.
Unilever believes that the contribution of the business to this
objective can best be measured and communicated to investors
through the following measures:
• The delivery, over time, of Ungeared Free Cash Flow (UFCF),
which expresses the translation of profit into cash, and thus
longer-term economic value; and
• The development, over time, of Return on Invested Capital
(ROIC), which expresses the returns generated on capital
invested in the Group.
Unilever communicates progress against these measures
annually, and management remuneration is aligned with these
objectives. The UFCF over a three-year period is incorporated as a
performance element of Unilever’s management incentive
scheme.
UFCF and ROIC are non-GAAP measures. We comment on these
in detail here since they are the way in which we communicate
our ambition and monitor progress towards our longer-term value
creation goals and in order to:
• improve transparency for investors;
• assist investors in their assessment of the long-term value
of Unilever;
• ensure that the measures are fully understood in the light of
how Unilever reviews long-term value creation for shareholders;
• properly define the metrics used and confirm their calculation;
• share the metrics with all investors at the same time; and
• disclose UFCF as it is one of the drivers of management
remuneration and therefore management behaviour.
As investor measures, we believe that there are no GAAP
measures directly comparable with UFCF and ROIC. However,
in the tables on pages 41 and 42, we reconcile each as follows:
UFCF to cash flow from operating activities and also to net profit;
ROIC to net profit.
Caution
Unilever cautions that, while UFCF and ROIC are widely used as
tools for investment analysis, they are not defined terms under
IFRS or other GAAP and therefore their definitions 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.