Notes to the accounts

2 Financial risk management

The group's multinational operations and debt financing expose it to a variety of financial risks. In the course of its business, the group is exposed to foreign currency risk, interest rate risk, funding risk, and credit risk. Financial risk management is an integral part of the way the group is managed. Financial risk management policies are set by the Board of directors. These policies are implemented by a central treasury department that has formal procedures to manage foreign exchange risk, interest rate risk, and funding risk, including where appropriate the use of derivative financial instruments. The group has clearly defined authority and approval limits.

In accordance with its treasury policy, the group does not hold or use derivative financial instruments for trading or speculative purposes. Such instruments are only used to manage the risks arising from operating or financial assets or liabilities or highly probable future transactions.

a) Foreign currency risk

Foreign currency risk arises both where sale or purchase transactions are undertaken in foreign currencies (transactional exposures) and where the results of overseas companies are consolidated into the group's reporting currency of £sterling (translational exposures). The group has operations around the world which record their results in a variety of different local functional currencies. In countries where the group does not have operations, it invariably has some customers or suppliers that transact in a foreign currency. The group is therefore exposed to the changes in foreign currency exchange rates between a number of different currencies but the group's primary exposures relate to the US$, euro and £sterling and, to a lesser extent, the Japanese yen. Where appropriate the group manages its foreign currency exposures using derivative financial instruments.

Historically, the group has used zero cost average rate options to manage, to a greater or lesser extent, both transactional and translational foreign currency exposures. The last such derivative financial instrument expired on 31 December 2005 and the group has no current intention of using average rate options as a hedging instrument in future.

The group manages its transactional exposures to foreign currency risks through the use of forward exchange contracts. Forward exchange contracts are typically used to hedge highly probable forecast sale transactions which can be forecast to occur from anything between 1 and 18 months into the future.

The group's translational exposures to foreign currency risks can relate both to the income statement and net assets of overseas subsidiaries. Following the expiry of the last zero cost average rate option on 31 December 2005, the group's policy is not to hedge the translational exposure that arises on consolidation of the income statements of overseas subsidiaries. The group finances overseas company investments partly through the use of foreign currency borrowings in order to provide a natural hedge of foreign currency risk arising on translation of the group's net investment.

b) Interest rate risk

Interest rate risk comprises both the interest rate price risk that results from borrowing at fixed rates of interest and also the interest cash flow risk that results from borrowing at variable rates. Where appropriate interest rate swaps are used to manage the group's interest rate profile.

At this time, the majority of the group's borrowings attract fixed rates of interest payments and therefore the group's principal interest rate risk is a price risk.

c) Funding risk

Funding risk represents the risk that the group encounters difficulties in raising finance in order to meet its financial obligations as they fall due. The group manages this risk by maintaining adequate committed lines of funding from high quality lenders.

During July 2006, the $100m 1996 Private Placement loans will become due for repayment. New committed facilities have already been negotiated which, together with the free cash flow generated by the group, will provide sufficient funds to repay these loans and ensure that the group's funding risks remain at an acceptable level.

d) Credit risk

Credit risk arises because a counterparty may fail to perform its obligations. The group is exposed to credit risk on financial assets such as cash balances, derivative financial instruments, trade and other receivables.

The group's credit risk is primarily attributable to its trade receivables.The amounts recognised in the balance sheet are net of appropriate allowances for doubtful receivables, estimated by the group's management based on prior experience and their assessment of the current economic environment. Trade receivables are subject to credit limits and control and approval procedures in the operating companies. Due to its large geographic base and number of customers, the group is not exposed to material concentrations of credit risk on its trade receivables.

Credit risk associated with cash balances and derivative financial instruments is managed by transacting with financial institutions with high quality credit ratings. Accordingly the group's associated credit risk is limited. The group has no significant concentration of credit risk.

The group's maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, in the group balance sheet.