Unilever 2009 Annual Report Download - page 35

Outlook and risks (continued)
32 Unilever Annual Report and Accounts 2009
Report of the Directors About Unilever
Description of risk What we are doing to manage the risk
Financial/Treasury
• Funding the ongoing operation of the business
• Counterparty default in a financial institution
• Managing currency and interest rate differences and
movements
• Efficiently meeting our pension fund and tax obligations
As a global organisation Unilever’s asset values, earnings and cash
flows are influenced by a wide variety of currencies, interest rates,
tax jurisdictions and differing taxes. If we are unable to manage our
exposures to any one, or a combination, of these factors, this could
adversely impact our cash flow, profits and/or profit margins. A
material and significant shortfall in net cash flow could undermine
Unilever’s 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. In times of financial market volatility, we are also
potentially exposed to counterparty risks with banks.
We are exposed to market interest rate fluctuations on our floating
rate debt. Increases in benchmark interest rates could increase the
interest cost of our floating rate debt and increase the cost of
future borrowings. Our inability to manage the interest cost
effectively could have an adverse impact on our cash flow, profits
and/or profit margins.
Because of the breadth of our international operations we are
subject to risks from changes to the relative value of currencies
which can fluctuate widely and could have a significant impact on
our assets, cash flow, turnover, profits and/or profit margins.
Further, because Unilever consolidates its financial statements in
euros it is subject to exchange risks associated with the translation
of the underlying net assets of its foreign subsidiaries. We are also
subject to the imposition of exchange controls by individual
countries which could limit our ability to import materials paid by
foreign currency or to remit dividends to the parent company.
Certain businesses have defined benefit pension plans, most now
closed to new employees, which are exposed to movements in
interest rates, fluctuating values of underlying investments and
increased life expectancy. Changes in any or all of these inputs
could potentially increase the cost to Unilever of funding the
schemes and therefore have an adverse impact on profitability and
cash flow.
In view of the current economic climate and deteriorating
government deficit positions, tax legislation in the countries in
which we operate may be subject to change, which may have an
adverse impact on our profits.
A key target for the Group is to manage our financial affairs so as
to maintain our A1/A+ credit rating, which gives us continued
access to the global debt markets, even when the overall financial
markets are under stress. We seek to manage our liquidity
requirements by maintaining access to global debt markets through
short-term and long-term debt programmes. In addition, we have
committed credit facilities to underpin our commercial paper
programme and for general corporate purposes. We regularly
update our cashflow forecasts and assess the range of volatility due
to pension asset values, interest rates and currencies. We
concentrate cash in parent and finance companies to ensure
maximum flexibility for meeting changing business needs. We
finance our operating subsidiaries through a mixture of retained
earnings, third-party borrowings and loans from parent and group
companies. Group Treasury regularly monitors exposure to our
third-party banks, tightening counterparty limits where appropriate.
The Group actively manages its banking exposures on a daily basis.
In order to minimise interest costs and reduce volatility, our interest
rate management policy aims to achieve an appropriate balance
between fixed and floating rate interest exposures on forecast net
debt levels for the next five years. 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 order to manage currency exposures we maintain a policy
whereby operating companies manage trading and financial foreign
exchange exposures within prescribed limits and by the use of
forward foreign exchange contracts. Regional groups monitor
compliance with this policy. Further, operating companies borrow in
local currency 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.
Our pension investment policies require us to invest across a range
of equities, bonds, property, hedge funds and cash such that the
failure of any single investment will not have a material impact on
the overall value of assets. The majority of assets, including those
held in our ‘pooled’ investment vehicle, ‘Univest’, are managed by
external fund managers and are regularly monitored by pension
trustees and central pensions department.
On tax, we maintain high quality tax compliance procedures and
documentation, execute prudent tax planning strategies and make
proper provision for current and deferred taxation. Deferred tax
assets are reviewed regularly for recoverability.