Unilever 2003 Annual Report Download - page 48

Unilever Annual Report & Accounts and Form 20-F 2003 45
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 71.
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 reorganising or divesting under-
performing businesses – include the following:
Our brands:
A key element of our strategy is the development of a small
number of global leading brands. Any adverse event affecting
consumer confidence or continuity of supply of such a brand
would have an impact on the overall business.
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.
Developing our managers:
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.
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. 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
2003 was €292 million compared with €417 million in 2002.
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 2003 were not material.
Managing restructuring and reorganisation programmes:
Unilever is engaged in a wide-ranging business transformation
programme, Path to Growth, which has the potential temporarily
to disrupt normal business operations. Through our change
management expertise and detailed execution plans, we have
experienced no material disruption during the first four years
of Path to Growth.
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 11 and 12.
Borrowings:
The Group had gross borrowings totalling €15 900 million at the
end of 2003. Any shortfalls in our cash flow to service these
borrowings could undermine our credit rating and overall investor
confidence. Market, interest rate and foreign exchange risks to
which the Group is exposed are described on page 46.
Pensions and similar obligations:
Pension assets and liabilities (pre-tax) of €12 918 million and
€17 870 million respectively are held on the Group’s balance
sheet as at 31 December 2003. 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 17 on page 99.