Unilever 2002 Annual Report Download - page 42

Financial review 39
Unilever Annual Report & Accounts and Form 20-F 2002
Report of the Directors
is avoided. There was no significant concentration of credit
risks with any single counterparty as at the year-end.
As a result of hedging the share option plans 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. In 2001 we also entered into a contract
with a bank for the forward purchase of Unilever shares,
further details of which are given in note 15 on page 86.
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.
Risk management
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’ on page 2.
The analysis below presents the sensitivity of the fair value
of the financial and derivative instruments the Group held
at 31 December 2002, to the hypothetical changes
described below.
Interest rate risk
The fair values of debt, investments and related hedging
instruments are 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 2002.
Foreign exchange rate risk
The fair values of debt, investments and hedging
instruments, denominated in currencies other than the
functional currency of the entities holding them, are
subject to exchange rate movements. The analysis shows
the sensitivity of these fair values to a hypothetical 10%
change in foreign exchange rates as at 31 December 2002.
Fair value changes:
Sensitivity to a
hypothetical 10% change in
rates as at 31 December
€million €million
2002 2001
Interest rate risk 298 243
Foreign exchange rate risk 128
Further details on derivatives, foreign exchange exposures
and other related information on financial instruments are
given in note 15 on pages 85 and 86.
Supply risk and commodities contracts
Unilever’s products are manufactured from a number
of raw materials. While materials are expected to be in
adequate supply, any shortages or disruptions in supply
would have a material adverse effect on gross margin.
Some of our businesses, principally edible fats companies
in Europe, may use forward contracts over a number of
oils to hedge future requirements. We purchase forward
contracts in bean, rape, sunflower, palm, coconut and
palm kernel oils, almost always for physical delivery.
We may also use futures contracts to hedge future price
movements; however, the amounts are not material.
The total value of open forward contracts at the end
of 2002 was €417 million compared with €292 million
in 2001.
In addition, our plantations businesses may use forward
contracts for physical delivery of palm oil and tea under
strictly controlled policies and exposure limits. We had
no material outstanding contracts at the end of 2002.
Distribution
Unilever’s products are generally sold through its sales force
and through independent brokers, agents and distributors
to chain, wholesale, co-operative and independent
grocery accounts, food service distributors and institutions.
Products are distributed through distribution centres,
satellite warehouses, company-operated and public storage
facilities, depots and other facilities.
Unilever has undertaken several initiatives to work with
its customers to accelerate the development of product
categories, to optimise the flow of merchandise and the
inventory levels of its customers. These include efficient
consumer response (ECR) to achieve optimal stock
management, automatic stock replenishments and
just-in-time delivery using electronic data interchange
(EDI) to co-ordinate stock levels in stores and at Unilever’s
warehouses. ECR is also a process used by Unilever and
retailers to understand, and deliver against, consumer
demand and expectations.
Impact of price changes
Information concerning the impact of price changes on
tangible fixed assets and depreciation is shown in note 10
on page 81.
Other risk factors
Particular risks and uncertainties that could cause actual
results to vary from those described in forward-looking
statements within this document, or which could impact
on our ability to meet our published targets under the
Path to Growth strategy – which consists of focusing
resources on leading brands, closing manufacturing sites
and re-organising or divesting under-performing
businesses – include those previously described above
and the following:
•Managing restructuring and reorganisation programmes:
Unilever has announced wide-ranging business
restructuring initiatives. This high level of change absorbs
considerable management time and can interrupt normal
business operations.