Our Key Performance Indicators
Measuring our performance
We have a wide range of measures and indicators by which the Board assesses performance compared to the Group’s strategy.
The Group’s goal to create shareholder value through the strategies of Growth, Productivity, Responsibility and Winning Organisation is best measured by the main financial drivers of the business. To ensure management’s focus is aligned with the interests of our shareholders, these measures form the basis upon which the levels of incentives for the global organisation are decided. They are described below as our seven Key Performance Indicators (KPIs). Some of these KPIs are used to set the targets for the Group’s performance over three years and some are focused on the short term. These KPIs were chosen as they are mainly based on published results or can be calculated from them. They are therefore reliable and are not based on subjective measures or interpretations.
A number of other Business Measures, financial and non-financial, are monitored and assessed on a frequent basis to ensure that all the Group’s strategies are delivered. Although all these are not included in management’s incentives, we believe that these Business Measures are all contributing to the success of the Group, particularly over the longer term.
We have therefore included, in this Review, some additional Business Measures relating to the Responsibility and Winning Organisation elements of our strategy. Our progress under Productivity is, of course, covered by the information we already publish about the Supply Chain and Overheads and Indirects programmes.
These measures and the performance relating to them, are discussed in Productivity, Responsibility and Winning Organisation.
The Remuneration Committee sets targets at different levels, based on the Group budget approved by the Board in December. The KPIs used in 2006 have been retained for 2007.
Measuring short term performance Net revenue growth
Net revenue for 2006 grew by 5 per cent. The long term goal is to grow net revenue, on average, by 3-3.5 per cent per annum.
The net revenue figure is calculated as the revenue of the Group after the deduction of any duties, excise and other taxes, as published in the Group Income Statement.
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Global Drive Brand volume
A key strength of the Group is its diversified Global Drive Brands (GDBs) portfolio. The growth of the four GDBs Dunhill, Kent, Lucky Strike and Pall Mall is therefore a key driver of the Group strategy and is measured as one of the KPIs.
In 2006, GDB overall volume grew by 17 per cent to 146 billion compared to 9 per cent growth in 2005. Our target is to achieve high single figure growth.
GDB volumes are calculated as the total volumes of the four brands sold by our subsidiaries.
More information about the GDBs and their individual performances, is provided in this Review in Growth.
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Share of global volume amongst key players
The long term goal is to become the leading international tobacco company and British American Tobacco is currently second.
In 2006, our share of global volumes amongst key players grew by 0.2 per cent. Share of global volume is calculated as the volumes sold by Group subsidiaries as a percentage of the volumes sold by all international players, namely Philip Morris International, Japan Tobacco, Imperial Group, Gallaher and Altadis. The information used to complete this calculation is based on publicly available information and internal company analysis.
In our endeavour to grow global volumes, we assess all available acquisition opportunities on a frequent basis, but will only make a move when it is both financially and strategically attractive.
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Organic operating profit growth
The Group’s long term aim is to grow organic underlying operating profit by 6 per cent per annum, on average. For 2006, it was 7 per cent and for 2005, it was 9 per cent.
Organic profit used in this assessment is the operating profit of the Group’s subsidiaries, excluding any exceptional items – the items shown as memorandum information on the Group Income Statement.
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The Group’s free cash flow in 2006 was £1,541 million, marginally below 2005.
Free cash flow is defined as net cash from operating activities (including dividends from associates, restructuring costs and taxation) less net interest, net capital expenditure and dividends to minorities – the change in free cash flow is described in Cash flow.
The purpose of this measure is to ensure that the Group generates sufficient cash to fund its operations, pay dividends to its shareholders, operate the share buy-back programme and undertake other investment opportunities that may arise.
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Measuring long term performanceEarnings per share
Adjusted diluted earnings per share (Adjusted EPS) grew at an average of 12.4 per cent per annum since the beginning of 2004. This compared favourably to the long term goal of growing at the rate of high single figures per annum, on average, over the medium to long term. Adjusted EPS grew 10 per cent in 2006 (2005: 17 per cent).
Adjusted diluted EPS is the best measure to assess the underlying performance of the business, as it excludes all significant distortions (one-off and exceptional items that occur) but includes the potentially dilutive effect of employee share schemes. The detail of the calculation and the adjustments made, are explained in note 7 to the accounts included in the Annual Report and Accounts. This calculation removes the impact of the exceptional items shown as memorandum information on the Group Income Statement. These items are the restructuring costs and impairment of a business, offset by gains on disposal of brands. In addition, the calculation also adjusts for certain distortions in net finance costs arising under IFRS.
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