Unilever 2004 Annual Report Download - page 25

22 Unilever Annual Report and Accounts 2004
Financial review
(continued)
Off-balance sheet arrangements
We have conducted a review of our contractual arrangements
with potential variable interest entities (VIEs) as defined under US
generally accepted accounting principle FIN 46R. This review
confirmed that there are no significant VIE relationships which are
not already appropriately reflected in the accounts. Further details
are given on page 159.
Cash flow
Cash flow from operating activities increased by €73 million to
€6 853 million. Lower group operating profit BEIA and increased
contributions to pension funds were offset by reduced working
capital levels.
Returns on investment and servicing of finance cash outflows
were €373 million lower as a result of reduced interest cost and
higher dividends paid to minority shareholders in the comparative
period. The drivers of lower interest costs were reduced debt
levels and lower interest rates.
Net capital expenditure and financial investment was at a similar
level to the prior year, which included a €234 million cash inflow
from the sale of a fixed rate investment. Net cash inflows from
acquisition and disposals were €306 million lower than in 2003.
Ungeared free cash flow
Our ungeared free cash flow delivery in 2004 was strong at
€4 856 million. However, this reflects a low tax rate and the
effects of various non-cash provisions, such as Slim•Fast and
other exceptional charges. A more representative base would be
€4.2 billion. A definition of this measure and its reconciliation
to cash flow from group operating activities can be found on
page 6. The strong cash flow together with the weaker US dollar
enabled net debt to be reduced to €9.7 billion at current
exchange rates. This has enabled an increased dividend payout
for 2004 and the announcement of a share buy-back programme
for 2005.
Finance and liquidity
Unilever aims to be in the top third of a reference group for Total
Shareholder Return of 21 international consumer goods
companies, as explained below. The Group’s financial strategy
supports this objective and provides the financial flexibility to
meet its strategic and day-to-day needs. The key elements of the
financial strategy are:
• Appropriate access to equity and debt capital;
• Sufficient flexibility for tactical acquisitions;
• A1/P1 short-term credit rating;
• Sufficient resilience against economic turmoil; and
• Optimal weighted average cost of capital, given the constraints
above.
An adjusted EBITDA net interest cover greater than 8 times is
consistent with this strategy. An interest cover below this level is
acceptable for a period following major acquisitions.
The definition and further details on the net interest cover ratios
are given on page 6, 149 and 151.
Unilever concentrates cash in the parent and finance companies
in order to ensure maximum flexibility in meeting changing
business needs. Operating subsidiaries are financed through the
mix of retained earnings, third-party borrowings and loans from
parent and group financing companies that is most appropriate to
the particular country and business concerned. Unilever maintains
access to global debt markets through an infrastructure of short-
term debt programmes (principally US domestic and euro
commercial paper programmes) and long-term debt programmes
(principally a US Shelf registration and euromarket Debt Issuance
Programme). Debt in the international markets is, in general,
issued in the name of NV, PLC or Unilever Capital Corporation.
NV and PLC will normally guarantee such debt where they are not
the issuer.
Treasury
Unilever Treasury’s mission is to ensure that Unilever maintains the
financial flexibility necessary to execute its business strategies and
create shareholder value. Unilever Treasury’s role is to ensure that
appropriate financing is always available for all value-creating
investments. Additionally, Treasury delivers 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. 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. Reviews are undertaken
by the corporate internal audit function.
The key financial instruments used by Unilever are short- and
long-term borrowings, cash and other fixed and current
investments and certain straightforward derivative instruments,
principally comprising interest rate swaps and foreign exchange
contracts. The accounting for derivative instruments is discussed
in Accounting information and policies on page 98. The use of
leveraged instruments is not permitted.
Other relevant disclosures are given in notes 15 and 16 on pages
118 to 121.
Unilever Treasury manages a variety of market risks, including the
effects of changes in foreign exchange rates, interest rates and
credit spreads. Further details of the management of these risks
are given on page 51.