Risk and other factors

Financial market risks

The Company redenominated its share capital and its functional currency changed to US dollars with effect from 5 February 2007. The Group now publishes its consolidated annual accounts in US dollars. The Group held approximately 78% of its total assets in US dollars at 2 February 2008 and generated approximately 74% of its sales and 71% of its operating profit in US dollars for the financial year then ended. The remainder of the Group’s assets, sales and profit are in the UK, therefore in translating the results of its UK operations, the Group’s results are subject to fluctuations in the exchange rate between the pound sterling and the US dollar. With the change in reporting currency the impact of movements in the exchange rate on the reported results of the Group is opposite to that which it has been historically. Accordingly, any decrease in the weighted average value of the US dollar against the pound sterling could increase reported revenues and operating profit and any appreciation in the weighted average value of the US dollar against the pound sterling could decrease reported revenues and operating profit. The Board has chosen not to hedge the translation effect of exchange rate movements on the results of the Group given that there is little movement of cash between the Group’s two divisions. As part of its long term strategy, the Group may seek, where appropriate, to finance its UK net assets with borrowings denominated in pounds sterling, as a hedge against the impact of exchange rate fluctuations on its UK operating profit.

In cases where pounds sterling are used to fund cash flow requirements of the UK division or at a Corporate level, fluctuations in the exchange rate between the pound sterling and the US dollar will affect the amount of the Group’s consolidated borrowings.

In addition, the prices of materials and certain products bought on the international markets by the UK division are denominated in US dollars, and therefore the division has an exposure to exchange rates on the cost of goods sold. The Group does use hedging operations in respect of purchases of US dollars by its UK division, within treasury guidelines approved by the Group’s Board.

Cash dividends in respect of the Company’s ordinary shares are declared in US dollars. Fluctuations in the exchange rate between the pound sterling and the US dollar will affect the sterling amount received by shareholders who receive payment in pounds sterling.

Fluctuations in the exchange rate between the pound sterling and the US dollar will affect the US dollar equivalent of the pound sterling price of the shares on the London Stock Exchange and, as a result, are likely to affect the market price of the ADSs in the US.

The table Exchange rates between the pound sterling and the US dollar sets out, for the calendar years indicated, the average, high, low and period end exchange rates for the pound sterling expressed in US dollars per £1.

The Group’s policy is to manage financial risk resulting from exposure to currency and interest rate fluctuations. Interest rate exposure is managed through the use of swaps, caps and floors.

A committee of the Board is responsible for the implementation of treasury policies and guidelines which are considered to be appropriate by the Board for the management of financial risk. The Group’s funding, liquidity and exposure to interest rate and exchange rate risks are managed by the Group’s treasury department. The Group uses derivative instruments for risk management purposes only, and these are transacted by specialist treasury personnel.

Exchange rates between the pound sterling and the US dollar(1)

  Average High Low At period end
Calendar year        
2002 1.51 1.61 1.41 1.61
2003 1.62 1.79 1.55 1.77
2004 1.79 1.96 1.75 1.92
2005 1.90 1.93 1.85 1.88
2006 1.82 1.99 1.72 1.96
2007 1.97 2.12 1.92 1.99
2008 (cumulative to 8 April 2008) 1.99 2.04 1.93 1.97
 
Month        
September 2007 2.01 2.05 1.99 2.05
October 2007 2.04 2.08 2.02 2.08
November 2007 2.07 2.12 2.04 2.06
December 2007 2.03 2.07 1.97 1.98
January 2008 1.97 2.00 1.93 1.99
February 2008 1.97 2.00 1.94 1.99
March 2008 1.99 2.04 1.97 1.98

(1)Based on unweighted data points sourced from Reuters.


For financial instruments held, the Group has used a sensitivity analysis technique that measures the change in the fair value of the Group’s financial instruments from hypothetical changes in market rates and this is shown in the table below.

The amounts generated from the sensitivity analysis are forward-looking estimates of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially from those projected due to changes in the portfolio of financial instruments held and actual developments in the global financial markets. These may cause fluctuations in interest and exchange rates to exceed the hypothetical amounts disclosed in the table below.

The example shown for changes in the fair values of borrowings and associated derivative financial instruments at 2 February 2008 is set out in the table below. The fair values of borrowings and derivative financial instruments are estimated by discounting the future cash flows to net present values using appropriate market rates prevailing at the period end.

The estimated changes in fair values for interest rate movements are based on an instantaneous decrease of 1% (100 basis points) in the specific rate of interest applicable to each class of financial instruments from the levels effective at 2 February 2008 with all other variables remaining constant.

The estimated changes in the fair value for foreign exchange rates are based on an instantaneous 10% weakening of the pound sterling against the US dollar from the levels applicable at 2 February 2008 with all other variables remaining constant.


Fair value changes arising from:

  Estimated
fair value
2 February
2008$m		 1% decrease in
interest rates
(unfavourable)
$m		 10% strengthening
in $ against £
(unfavourable)/
favourable
$m		 Estimated
fair value at
3 February
2007
$m
Borrowings (416.3) (11.5) - (385.5)
Foreign currency receivable 34.7 - (3.5) 40.3
Foreign exchange contracts 0.3 - 8.0 (0.6)
Commodity hedging contracts 9.6 - - 8.1

The analysis above should not be considered a projection of likely future events.

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