Unilever 2008 Annual Report Download - page 116

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Notes to the consolidated accounts Unilever Group
Unilever Annual Report and Accounts 2008 113
Financial statements
17 Financial instruments and treasury risk management (continued)
Capital management
The Group’s financial strategy supports Unilever’s aim to be in the top third of a reference group including 20 other international consumer
goods companies for Total Shareholder Return, as explained on page 43. The key elements of the financial strategy are:
• appropriate access to equity and debt markets;
• sufficient flexibility for acquisitions that we fund out of current cash flows;
• A+/A1 long-term credit rating;
• A1/P1 short-term credit rating;
• sufficient resilience against economic and financial turmoil; and
• optimal weighted average cost of capital, given the constraints above.
For the A1/P1 short-term credit rating the company monitors the qualitative and quantitative factors utilised by the rating agencies. This
information is publicly available and is updated by the credit rating agencies on a regular basis.
The capital structure of Unilever is based on management’s judgement of the appropriate balancing of all key elements of its financial strategy
in order to meet its strategic and day-to-day needs. We consider the amount of capital in proportion to risk and manage the capital structure
and make adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. Unilever will take
appropriate steps in order to maintain, or if necessary adjust, the capital structure. Annually the overall funding plan is presented to the Board
for approval.
Return on Invested Capital continues to be one of Unilever's key performance measures. Within this definition we have defined the components
of our Invested Capital. See page 42 for the details of this definition and the calculation of Unilever's Return on Invested Capital.
Unilever is not subject to covenants in any of its significant financing agreements.
Income statement sensitivity to changes in foreign exchange rates
The values of debt, investments and related hedging instruments, denominated in currencies other than the functional currency of the entities
holding them, are subject to exchange rate movements. The translation risk on the foreign exchange debtors and creditors is excluded from this
sensitivity analysis as the risk is considered to be immaterial because positions will remain within prescribed limits (see currency risks on
page 108).
The remaining foreign exchange positions at 31 December 2008 mainly relate to unhedged US $ loans (total amount at 31 December 2008
US $65 million). A reasonably possible 10% change in rates would lead to a €5 million movement in the income statement (2007: €7 million),
based on a linear calculation of our exposure.
Income statement sensitivity to changes in interest rate
Interest rate risks are presented by way of sensitivity analysis. As described on page 108, Unilever has an interest rate management policy aimed
at optimising net interest cost and reducing volatility in the income statement. As part of this policy, part of the funds/debt have fixed interest
rates and are no longer exposed to changes in the floating rates. The remaining floating part of our funds/debt (see interest rate profile tables
on pages 104 for the assets and 107 for the liabilities) is exposed to changes in the floating interest rates.
The analysis below shows the sensitivity of the income statement to a reasonably possible one percentage point change in floating interest rates
on a full-year basis.
Sensitivity to a reasonably possible
one percentage point change in
floating rates as at 31 December
€ million € million
2008 2007
Funds 77 25
Debt (105) (55)
Net investment hedges: sensitivity relating to changes in foreign exchange rates
To reduce the retranslation risk of Unilever's investments in foreign subsidiaries, Unilever uses net investment hedges. The fair values of these
net investment hedges are subject to exchange rate movements and changes in these fair values are recognised directly in equity and will offset
the retranslation impact of the related subsidiary.
At 31 December 2008 the nominal value of these net investment hedges amounts to €5.1 billion (2007: €7.5 billion) mainly consisting of US$/€
contracts. A reasonably possible 10% change in rates would lead to a fair value movement of €513 million (2007: €750 million). This
movement would be fully offset by an opposite movement on the retranslation of the book equity of the foreign subsidiary.
Cash flow hedges: sensitivity relating to changes in interest rates and foreign exchange rates
Unilever uses on a limited scale both interest rate and forex cash flow hedges. The fair values of these instruments are subject to changes in
interest rates and exchange rates. Because of the limited use of these instruments and the amount of Unilever's equity, possible changes in
interest rates and exchange rates will not lead to fair value movements that will have a material impact on Unilever's equity.