Overview

Free Cash Flow

References to Free Cash Flow refer to the amount of cash we generate after meeting all our obligations for interest and tax and after all capital investment.

Net capital expenditure includes purchases of property, plant and equipment of £500 million (2007: £409 million) less proceeds on disposal of property, plant and equipment of £18 million (2007: £57 million).

Free Cash Flow is not a defined term under IFRS and may not therefore be comparable with other similarly titled non-GAAP cash flow measures reported by other companies. Free Cash Flow is the measure we use for internal cash flow performance analysis and is the primary cash flow measure seen and used by the CEC. We believe that Free Cash Flow is a useful measure because it shows the amount of cash flow remaining after the cash generated by the Group through operations has been used to meet purposes over which the Group has little or no discretion such as taxation and interest costs or those which are characteristic of a continuing business, for example capital expenditure. Free Cash Flow therefore represents the amount of cash generated in the year by the business and provides investors with an indication of the net cash flows generated that may be used for, or are required to be funded by, other discretionary purposes such as investment in acquisitions, business disposals and the drawing and repayment of financing.

In 2008, payments of £30 million (2007: £48 million) made into our principal Group defined benefit pension arrangements in respect of past service deficits have been excluded from Free Cash Flow. These payments are part of a wider pension funding strategy for the period from 2005 to 2008. We believe that the funding of these pension deficits is a discretionary use of Free Cash Flow comparable to the repayment of external borrowings and has therefore been added back in calculating Free Cash Flow. We will continue this reporting practice in future years. We continue to report the cash cost of funding pension obligations arising in respect of current year service within Free Cash Flow.

Consistent with the cash flow from disposals of subsidiaries being excluded from Free Cash Flow, associated tax payments are also excluded from the Group's definition of Free Cash Flow. Taxes paid on disposals in 2008 relate to the demerger of the Americas Beverages business.

We have also excluded the £53 million (2007: £nil) upfront financing costs paid in 2008 relating to debt demerged with the Americas Beverages business from Free Cash Flow.

Net debt

References to net debt refer to the total borrowings of our business, including both short-term and long-term bank loans, bonds and finance leases, after offsetting the cash and cash equivalents held by the business and our short-term investments. The table below reconciles net debt, as we define it, to the corresponding IFRS balance sheet captions.

Net debt is not a defined term under IFRS and may not therefore be comparable with other similarly titled non-GAAP debt measures reported by other companies. Net debt is the measure we use for internal debt analysis. We believe that net debt is a useful measure as it indicates the level of indebtedness after taking account of the financial assets within our business that could be utilised to pay down debt. In addition the net debt balance provides an indication of the net borrowings on which we are required to pay interest.

The IFRS cash flow statement reports all flows impacting the Group's cash and cash equivalents. As a result, certain significant factors impacting the Group's indebtedness including the impact of exchange rates or debt disposed, demerged or acquired are not shown in the cash flow statement. The table below reconciles the Group's opening to closing net debt position after taking these factors into consideration.