Unilever 2004 Annual Report Download - page 53

50 Unilever Annual Report and Accounts 2004
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 3.
Unilever’s system of risk management is outlined on page 92.
Responsibility for establishing a coherent framework for the
Group to manage risk resides with the Corporate Risk Committee.
The remit of the Corporate Risk Committee is outlined on page 57.
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 have been identified. In 2005, the most
significant risk that the business faces, and which therefore is the
key focus of the risk management process in 2005, arises in
ensuring the business moves from the Path to Growth strategy,
which concluded in December 2004, to the implementation
of the new organisation which we expect to be effective from
April 2005. In this context the following specific risks have been
identified as areas of focus in 2005:
Our brands
We have a number of large global brands, including 12 with an
annual turnover of greater than €1 billion. Any adverse event
affecting consumer confidence or continuity of supply of such a
brand would have an impact on the overall business. The carrying
value of intangible assets associated with many of our brands is
significant, and depends on the future success of those brands.
There remains a risk that events affecting one or more of our
global leading brands will potentially impair the value of the
brands. The Group therefore continues to monitor closely the
performance of our leading brands and will take appropriate
action to mitigate any threat to brand value.
Innovation
Our growth depends in large part on our ability to generate and
implement a stream of consumer-relevant improvements to our
products. The contribution of innovation is affected by the level of
funding that can be made available, the technical capability of the
research and development functions, and the success of operating
management in rolling out quickly the resulting improvements.
People
Unilever’s performance requires it to have the right calibre of
managers in place. We must compete to obtain capable recruits
for the business, and then train them in the skills and
competencies that we need to deliver growth. The business
transformation programme required to implement the new
organisation includes the risk of disruption to normal business
operations. This risk was inherent in the Path to Growth strategy
that was completed in December 2004; although we experienced
no material disruption to the business throughout the life of the
Path to Growth strategy, we will remain focused on avoiding such
disruption.
Economic conditions in developing countries
About a third of Unilever’s turnover comes from the group of
developing and emerging economies. We have long experience in
these markets, which are also an important source of our growth.
These economies are more volatile than those in the developed
world, and there is a risk of downturns in effective consumer
demand that would reduce the sales of our products.
Customer relationships and 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.
Sales to large customers or sales via specialised distribution
channels are significant in some of our businesses.
The loss of a small number of major customers or a major
disruption of a specialised distribution centre or channel could
have an adverse effect on the Group’s business and results
of operations.
Price and supply of raw materials and commodities
contracts
Unilever’s products are manufactured from a large number of
diverse materials. Unilever has experience in managing
fluctuations in both price and availability. However, movements
outside the normal range may have an impact upon margins.
Some of our businesses, principally edible fats companies in
Europe, may use forward contracts over a number of oils to
hedge future requirements. None of these contracts are entered
into for speculative purposes. 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
2004 was €200 million compared with €292 million in 2003.
In addition, our plantations businesses may use forward contracts
for physical delivery of palm oil and tea under strictly controlled
policies and exposure limits. Outstanding forward contracts at the
end of 2004 were not material.
Corporate reputation
Unilever has a good corporate reputation and many of our
businesses, which operate in some 100 countries around the
world, have a high profile in their region. Unilever products
carrying our well-known brand names are sold in over 150
countries. Should we fail to meet high product safety, social,
environmental and ethical standards in all our operations and
activities, Unilever’s corporate reputation could be damaged,
leading to the rejection of our products by consumers, devaluation
of our brands and diversion of management time into rebuilding
our reputation. Examples of initiatives to manage key social and
environmental risks are mentioned on pages 12 and 13.
Pensions and similar obligations
Pension assets and liabilities (pre-tax) of €13 529 million and
€18 758 million respectively are held on the Group’s balance
sheet as at 31 December 2004. Movements in equity markets,
interest rates and life expectancy could materially affect the level
of surpluses and deficits in these schemes, and could prompt the
need for the Group to make additional pension contributions in
the future. The key assumptions used to value our pension
liabilities are set out in note 18 on page 123.