Unilever 2008 Annual Report Download - page 29

Outlook and risks continued
By concentrating our resources on areas where we have leading
category and brand positions we seek to strengthen our overall
competitive position. We also seek in-fill acquisitions to support
our category and geographical ambitions.
In the current climate, we also face counterparty risk with
customers. The Group establishes limits for key customers, reviews
these regularly and takes necessary action to manage this risk.
In respect of our route to market, further consolidation among
retailers and the continued growth of discounters could adversely
impact our rate of sales growth and our profit margins. Our
success depends on our ability to manage successfully our trading
relationships with our key customers. We tackle this by
developing and adapting our customer-facing strategies and
plans, by optimising the return on the investment we make in
customers, and by continually improving our customer
development capabilities. A specific focus for us at the moment is
to improve our level of customer service.
Financial risks – liquidity, currency, interest,
pensions, taxation
Turbulence in the financial markets and the downturn in the
economic environment have heightened financial risks. As
Unilever operates on a global basis it is affected in a variety of
ways by such instability.
Several factors could affect liquidity management. A material and
significant shortfall in cash flow could undermine our credit
rating, impair investor confidence and hinder our ability to raise
funds, whether through access to credit markets, commercial
paper programmes, long-term bond issuances or otherwise.
During 2008, Unilever benefited from its strong single-A Balance
sheet ‘active financial management’, and the coming year will see
the continuation of the same policy. Maintaining our strong
single-A rating will remain a key priority.
To manage financial risks, the Group aims to concentrate cash in
the parent and finance companies in order to ensure maximum
flexibility in meeting changing economic needs. We finance our
operating subsidiaries through a mixture of retained earnings,
third-party borrowing and loans from parent and group
companies, with the mix determined by what is most appropriate
to the country concerned. We seek to manage our liquidity
requirements by maintaining access to global debt markets
through an infrastructure of short-term and long-term debt
programmes. In addition to this, Unilever has committed credit
facilities in place to support its commercial paper programmes
and for general corporate purpose. We plan on increasing
liquidity by reducing the outstanding commercial paper through
the issuance of long-term bonds, extending the maturity profile of
the remaining commercial paper and through continued active
management of our working capital positions.
Because of the breadth of our international operations, we are
subject to risks from changes in the relative value of currencies.
We intend to continue our policy whereby operating companies
manage trading and financial foreign exchange exposures within
prescribed exposure limits and the use of forward foreign
exchange contracts. On a case-by-case basis, companies may
decide whether or not to apply cash flow hedge accounting.
Regional groups monitor compliance with this foreign
exchange policy.
In addition, as Unilever conducts business in many foreign
currencies but publishes its financial statements and measures its
performance in euros, it is subject to exchange risks associated
with the translation of the underlying net assets of its foreign
subsidiaries. We aim to minimise our foreign exchange exposure
in operating companies by borrowing in local currencies, except
where inhibited by local regulations, lack of local liquidity or local
market conditions. For those countries that in the view of
management have a substantial retranslation risk, we may decide
to hedge such net investment through the use of foreign currency
borrowing or forward exchange contracts on which hedge
accounting is applied.
Increases in benchmark interest rates could increase the interest
cost of our debt and increase the cost of future borrowings.
These rates are susceptible to market fluctuations and volatility,
and any inability to manage this effectively could impact our cash
flows and profits. Our interest rate management policy aims to
achieve an optimal balance between fixed and floating rate
interest exposures on expected net debt levels for the next five
calendar years. The objective of the policy is to minimise annual
interest costs and to reduce volatility. We achieve this through a
combination of issuing fixed rate long-term debt and by
modifying the interest rate exposure of debt and cash positions
through the use of interest rate swaps.
In the current climate, we also face significant counterparty risk
from banks. The Group regularly reviews these and where
necessary tightens counterparty limits and reduces the maturity
profile of deposits to provide for maximum flexibility. The Group
actively manages its banking exposures on a daily basis.
Certain Unilever businesses have defined benefit pension plans.
Falling interest rates and market values of investments coupled
with increasing life expectancy could result in the cost of funding
these schemes increasing substantially.
Our pension investment policies are such that investments are
well diversified, and the failure of any single investment would
not have a material impact on the overall level of assets. The
plans seek to invest the largest proportion of the assets in
equities, which the Group believes offer the best returns over the
long term commensurate with an acceptable level of risk. The
pension funds also have a proportion of assets invested in
property, bonds, hedge funds and cash. The majority of assets are
managed by a number of external fund managers, with a small
proportion managed in-house. Unilever has a pooled investment
vehicle (Univest) which it believes offers its pension plans around
the world a simplified, externally managed investment vehicle to
implement their strategic asset allocation models currently for
equities and hedge funds.
In view of the current economic climate and deteriorating
government deficit positions, tax legislation in the regions in
which we operate may be subject to change, which may have an
adverse effect on our profits and on our ability to remit dividends
or service fees. We intend to continue with high quality tax
compliance and documentation, to execute prudent tax planning
strategies and to make proper provision for current and deferred
taxation. Deferred tax assets are reviewed regularly for
recoverability.
26 Unilever Annual Report and Accounts 2008
Report of the Directors