Selected key financial performance indicators

We monitor our financial performance and strength by measuring a number of key performance indicators. In addition to the key operating efficiency indicators for Industrial & Automotive and Building Products, the Board believes that the following measures provide a useful overview of the Group’s performance. Management use additional indicators to assess the performance of individual business units.

The return on average net operating assets declined during 2007 from 28.5% to 25.2% due to reduced operating profit.

We assess the ability of the Group to convert sales into profit before tax and interest by analysing the operating and EBITDA margins. Ongoing challenging markets, particularly within our Building Products group, have impacted on returns over the past two years, but lean initiatives and strong growth in emerging markets have allowed management to protect the margins to some degree. The operating margin has fallen from 9.4% in 2006 to 9.0% in 2007, and the EBITDA margin has decreased slightly from 13.1% to 12.9%.

Capital expenditure

The Group’s capital allocation strategy is monitored using a measure of net capital expenditure to depreciation (providing an insight into the utilisation versus replacement of capital expenditure) and capital expenditure as a percentage of sales (assessing the extent to which sales are used to fund the expansion and replacement of the capital assets that produce the sales). 2007 saw the net capital expenditure to depreciation ratio fall below 1.0, largely due to a focus on sustaining capital through restructuring and lean initiatives. 3.9% of continuing sales were spent on capital expenditure during 2007 which is consistent with 2006.

Cash flow

We assess the cash flow performance of each of our businesses and the Group based on the percentage of profit from operations (before gains/losses on disposal and exit of businesses) converted to operating cash flow (cash conversion). Cash flow after interest, tax and dividends indicates the after-tax cash available to the Group after internal investment (excluding acquisitions), finance costs and dividends paid to equity shareholders. During 2007, both of these metrics have shown strong improvements, demonstrating management’s continued focus on cash management. Cash conversion increased from 80.1% in 2006 to 89.5% in 2007, while cash flow after interest, tax and dividends improved from an outflow of £15.1 million in 2006 to an inflow of £22.9 million in 2007. Trends in cash flow metrics are used to assess the allocation of capital over the long term.