We implement and monitor performance against this strategy through a number of key performance indicators and objectives, both financial and non-financial. The principal ones and our performance against them in 2007 are shown below for the Group. Divisional information is given in the relevant section of this review.
In defining financial indicators we use management sales and management trading profit as defined on the Activities and Objectives page as this better reflects the underlying performance of the Group and respective divisions.
Financial key performance indicators
1. Growth in Group earnings and dividends per share
We aim to achieve absolute growth in earnings per share each year (as measured on a management basis) and, recognising the nature and cyclicality of our major markets, have a longer term target of achieving average compound annual growth of at least 6%.
Our objective is to increase progressively the dividend in line with the long term trend in earnings, targeting a sustainable earnings to dividend cover ratio of between 2 and 2.5 times.
For 2007 the Group has reported a 17% improvement in management earnings per share and this follows a 29% increase in 2006. These increases reflected both an improved profit performance in each year and lower tax charges. Using the cash tax rates (see Group Performance) of 17% in 2007 and 18% in 2006 would give an increase of 13% in 2007.
Dividends per share have increased progressively over the last five years and, demonstrating continuing confidence in the future prospects of the Group, the Board has proposed a 5.5% increase in the 2007 annual dividend to 13.5p. The proposed dividend is covered 2.6 times by earnings on a management basis or 2.3 times using the cash tax rate of 17%.
2. Growth in sales and trading margins
We aim to achieve growth in sales at both a Group and divisional level in excess of that seen in our major markets both in absolute terms and on a like-for-like basis, i.e. excluding the effects of currency translation, acquisitions or divestments.
In 2007 sales of subsidiaries rose by 6% to £3,869 million, while joint ventures, the sales of which are not consolidated in these accounts, have shown growth of 22%. Our total Group sales on a management basis increased by £280 million to £4,122 million. The organic change in this latter figure was £275 million, an increase of 7%, with all divisions exhibiting solid growth. As a result of its strong business wins in 2007 and earlier years, the Group expects to see continuing growth in 2008 and thereafter.
As regards trading margins, the Group expects to operate with a margin of between 8% and 10% for its Driveline and Powder Metallurgy businesses, 6% and 10% for Other Automotive, 7% and 10% for OffHighway and 10% or higher for the Aerospace division, giving an overall Group target of 8% to 10%. During 2007, the overall Group trading margin on a management basis increased to 7.5% from 7.1% largely reflecting improvement in Driveline.
3. Return on average invested capital
Return on average invested capital (ROIC) is defined as the ratio of management trading profit to average total net assets including the appropriate share of joint ventures and excluding current and deferred tax, cash, borrowings and post-employment obligations. We aim to achieve ROIC, at both a Group and divisional level, above the weighted average cost of capital of the Group.
To ensure our goals are clearly understood across the Group, we use 12% as the pre-tax threshold for all our internal ROIC measures and target all divisions to meet or exceed that level. On a post-tax basis we estimate this to be close to the Group’s long term weighted average cost of capital of between 8% and 9%.
For the Group as a whole ROIC rose to 15.1% from 14.4 % in 2007 with all divisions except Powder Metallurgy exceeding the threshold.
4. Group cash flow
The Group aims to generate sufficient cash flow each year to cover dividend payments and fund above sector organic growth. For these purposes cash flow is defined as after capital expenditure but before dividends, acquisitions, share buybacks, special contributions to the UK pension scheme, currency movements in overseas borrowings and the cash cost of the strategic restructuring programme. In 2007, the Group was once again able to achieve this goal.
With significantly lower spending on strategic restructuring, reduced capital expenditure and continued emphasis on working capital, the Group expects to improve cash generation in 2008 and future years.
Non-financial key performance indicators
The key non-financial indicators that we currently report relate to our health, safety and environmental performance and employee turnover.
1. Health and safety performance
Our ultimate goal is zero preventable accidents. We measure our progress against this goal by reference to accident frequency rate (AFR), which is the number of lost time accidents per 1,000 employees, and accident severity rate (ASR), which is the number of days/shifts lost due to accidents and occupational ill health per 1,000 employees. Both the AFR and ASR demonstrate continuing performance improvement over the last five years with AFR falling from 8.3 in 2003 to 3.4 in 2007 and ASR falling from 181 in 2003 to 99 in 2007 (see charts here). We are able to benchmark our AFR performance externally and against this measure we have significantly outperformed industry averages in the UK, Germany and the US and our performance compares favourably with that of our peer companies in the UK and the US where comparative data is available.
2. Environmental performance
Our focus remains on the key performance indicators of energy consumption and associated carbon dioxide (CO2) emissions, waste generation and recycled waste, and water usage. Given the diverse range of business processes across the Group, performance against these indicators is measured on a divisional basis (in the main, relative to production measured in terms of tonnes of product shipped). This also allows the use of an alternative metric for our Aerospace business; the drive towards ever lighter components means that sales, rather than weight of product shipped, is a more appropriate measure of activity. Performance data for CO2 emissions includes direct emissions from our plants and indirect emissions from power stations that generate the electricity we use. Overall, most divisions have maintained or slightly improved their performance in 2007 compared with the two prior years, click here to view charts.
3. Employees
Employees at the end of 2007 totalled 42,100 compared with 40,500 at the end of 2006, an increase of 4%. Of the total, 38,300 were employed in subsidiaries (a 3.5% increase over 2006) and 3,800 in joint ventures (an 8.6% increase over 2006).
For 2007, employee turnover represented 8% of the average number employed during the year. Of this, 4.7% was accounted for by voluntary leavers and 3.3% by company instigated action.
Further information on health and safety, environmental and employee issues is given here.