Unilever 2001 Annual Report Download - page 34

Unilever Annual Report & Accounts and Form 20-F 2001
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FINANCIAL REVIEW
Cash and current investments at the end of 2001 totalled
2 301 million (2000: 3 273 million); these funds were
held in euros (26%), sterling (15%), US dollars (3%), and
other currencies (56%). The funds are mainly to support
day-to-day needs and are predominantly invested in short-
term bank deposits and high-grade marketable securities.
Treasury and hedging policies
Unilever Treasury’s strategic purpose is to maintain Unilever’s
financial strength and flexibility within the context of the
long-term financial strategy set out in the ‘Finance and
liquidity’ section above. Unilever Treasury’s operational
purpose is to provide financial services to allow operating
companies to manage their financial transactions and
exposures in an efficient, timely and low cost manner.
Unilever Treasury operates as a service centre and is
governed by policies and plans agreed by the Executive
Committee of the Board. In addition to policies, guidelines
and exposure limits, a system of authorities and extensive
independent reporting covers all major areas of activity.
Performance is monitored closely. Independent reviews are
undertaken by the corporate internal audit function.
The key financial instruments held by Unilever are short-
and long-term borrowings, cash and other fixed and
current investments (all held on balance sheet) and certain
straightforward derivative instruments, principally comprising
interest rate swaps and foreign exchange contracts. The
accounting for derivative instruments is discussed in
Accounting Policies on pages 51 to 53. The use of leveraged
instruments is not permitted.
Unilever is exposed to a variety of market risks, including the
effects of changes in foreign exchange rates, interest rates
and credit spreads. Unilever also faces risks that are non-
financial or non-quantifiable, for example liquidity, country
and counterparty risks.
Unilever has an interest rate management policy aimed at
optimising net interest cost and reducing volatility. This is
achieved by modifying interest rate exposure of debt and
cash positions through the use of interest rate swaps. At the
2001 year-end the application of this policy meant that 53%
of our borrowings and 35% of our cash were fixed. Fixing
levels of projected debt were 54% for 2002 and 47% for
2003 (compared with 67% for 2001 and 57% for 2002 at
the end of 2000).
Unilever’s foreign exchange policy requires that operating
companies hedge trading and financial foreign exchange
exposures. This is achieved primarily through the use of
forward foreign exchange contracts. Some flexibility is
permitted within overall exposure limits. At year-end there
is no material exposure from companies holding assets and
liabilities other than in their functional currency.
Unilever aims to hedge the net investment in operating
companies through borrowings in the same currency, except
where the local regulations or lack of local liquidity inhibits
this. An exception may also be made where the economic
value of the net assets locally is considered to exceed their
book value substantially. Our business in the US is one such
example where the economic value of the assets is
considerably in excess of book value and accordingly we
have higher US dollar debt. From time to time, currency
revaluations will trigger exchange translation movements in
our balance sheet as a result of these exceptions. In 2001,
we suffered significant retranslation differences as a result
of the devaluations in Brazil (439 million) and Argentina
(416 million), together with the effect of the strengthening
of the US dollar on our net debt position in that currency.
The above reflects the effect exchange rate movements have
on book values of assets and liabilities but does not take
into account the underlying value of the assets we have in
the countries involved.
Our policies and strategies for the management of liquidity
risk are discussed in more detail on page 30.
Counterparty exposures are minimised by restricting dealing
counterparties to a limited number of financial institutions
that have secure credit ratings, by working within agreed
counterparty limits and setting limits on the maturity of
investments. Counterparty credit ratings are closely
monitored and concentration of credit risk with any
single counterparty is avoided. There is no significant
concentration of credit risks with any single counterparty
as at the year-end.
As a result of the share option program for employees, we
are exposed to movements in our own share price. In recent
years we have hedged this risk through buying Unilever
shares in the market when the share option is granted and
holding these shares until the share option is exercised or
lapses. This year we have also entered into a contract with
a bank for the forward purchase of Unilever shares, further
details of which are given on page 69. At the year-end 92%
of all outstanding employee share options were hedged;
based on Unilever’s experience with the exercise level of
options we consider this percentage as being fully hedged.
The following discussion about risk management activities
includes ‘forward-looking’ statements that involve risk and
uncertainties. The actual results could differ materially from
those projected. See the ‘Cautionary Statement’ at the front
of this document.
The analysis below presents the sensitivity of the fair value
of the financial and derivative instruments the Group held
at 31 December 2001, to the hypothetical changes
described below.
Interest rate risk
The fair value of debt, investments and related hedging
instruments is affected by movements in interest rates.
The analysis shows the sensitivity of the fair value of
interest rate sensitive instruments to a hypothetical 10%
change in the interest rates across all maturities as at
31 December 2001.
Report of the Directors