: financial policy :
dividend policy : The company continues to be committed to increasing the dividend paid to shareholders at a rate exceeding UK price inflation. However the financial demands of investing in the internet means that it is no longer appropriate to have a dividend policy which does not take into account this significant investment, both in earnings and cash terms. The board recognises that these new internet enterprises will not be earnings or cash generative in the short-term and that the costs and revenues associated with these investments will be hard to predict from year to year. The board has therefore concluded that it is not appropriate to relate the companys dividend to a definition of earnings which included the results of internet enterprises. It is therefore proposed that, for the time being at least, future dividends are related to adjusted earnings before internet enterprises with a target dividend cover level (adjusted earnings per share before internet enterprises expressed as a multiple of net dividend per share) of 2.5 times.
A final dividend of 13.9p is proposed giving a total for the year of 22.5p, a 7% increase on the 1998 dividend. This recommended dividend is covered 2.4 times by adjusted earnings before internet enterprises and will be fully funded by free cash flow.
treasury policy : The Group holds financial instruments for two principal purposes: to finance its operations and to manage the interest rate and currency risks arising from its operations and its sources of finance. The Group finances its operations by a mixture of cash flows from operations, short-term borrowings from banks and commercial paper markets, and longer term loans from banks and capital markets. The Group borrows principally in US dollars, euros and sterling, at both floating and fixed rates of interest, using derivatives, where appropriate, to generate the desired effective currency profile and interest rate basis. The derivatives used for this purpose are principally interest rate swaps, interest rate caps and collars, currency swaps and forward foreign exchange contracts.
The main risks arising from the Groups financial instruments are interest rate risk, liquidity and refinancing risk, counterparty risk and foreign currency risk. These risks are managed by the Group finance director under policies approved by the board which are summarised below. These policies have remained unchanged, except as disclosed, since the beginning of 1999. A treasury committee of the board receives reports on the Groups treasury activities, policies and procedures, which are reviewed periodically by a Group of external professional advisers. The treasury department is not a profit centre, and its activities are subject to audit.
interest rate risk : The Groups exposure to interest rate fluctuations on its borrowings is managed by borrowing on a fixed rate basis and by entering into interest rate swaps, interest rate caps and forward rate agreements. In September 1998 the Group amended its policy objective to set a target proportion of its forecast borrowings (taken at the year end, net of cash) to be hedged (i.e. fixed or capped) over the next five years of 50% to 65% for the first two years, and 40% to 60% for the next three years. At the end of 1999 that ratio was 58%. On a pro forma basis, taking into account the disposal of the Groups interests in the Lazard houses, that ratio was 74%. In view of this change to the debt portfolio, the Group will manage this position in order to return to within the designated policy. On that pro forma basis, a 1% change in the Groups variable rate US dollar, euro and sterling interest rates would have a £4m effect on its profit before tax.
liquidity and refinancing risk : The Groups objective is to procure continuity of funding at a reasonable cost. To do this it seeks to arrange committed funding for a variety of maturities from a diversity of sources. It has a policy that the weighted average maturity of its core gross borrowings (treating short-term advances as having the final maturity of the facilities available to refinance them) should be between three and eight years, and that non-bank sources should provide between 25% and 75% of such core gross borrowings.
Between July and November 1999 the Group issued E550m of bonds due 2004 and £250m of bonds due 2014. As a result, at the end of 1999 the average maturity of gross borrowings was 5.1 years and non-banks provided 46% of them (up from 4.4 years and 18% respectively at the beginning of the year). In addition, in February 2000 the Group issued E650m of bonds due 2007. Taking these as well as the Lazards disposal into account, on a pro forma basis the average maturity was 5.8 years and the proportion provided by non-banks was 79%. These pro forma adjustments to core gross borrowings result in the Group exceeding its target range for finance provided by non-banks. Again we will manage this position in order to return to within the designated policy. The proceeds of each bond issue were used to repay part of the Groups syndicated bank facility.
The Group believes that ready access to different funding markets also helps to reduce its liquidity risk, and that published credit ratings and published financial policies improve such access. The Group manages the amount of its net debt and the level of its net interest cover, principally by the use of a target range for net interest cover. All of the Groups credit ratings remained unchanged during the year. The long-term ratings are Baa1 from Moodys and BBB+ from Standard & Poors, and the short- term ratings are P2 and A2 respectively. The Group continues to operate on the basis that the board will take such action as is necessary to support and protect its current credit ratings. The Group also maintains undrawn committed borrowing facilities. At the end of 1999 these amounted to £517m, and their weighted average maturity was 2.5 years.
counterparty risk : The Groups risk of loss on deposits or derivative contracts with individual banks is managed in part through the use of counterparty limits. These limits, which take published credit limits (among other things) into account, are approved by the Group finance director. In addition, since the year end, for certain longer dated higher value derivative contracts the Group has entered into mark to market agreements whose effect is to reduce significantly the counterparty risk of the relevant transactions.
currency risk : Although the Group is based in the UK, it has a significant investment in overseas operations. The most significant currency for the Group is the US dollar, followed by the euro and sterling.
The Groups policy during the year on routine transactional conversions between currencies (for example, the collection of receivables, and the settlement of payables or interest) remained that these should be effected at the relevant spot exchange rate. As in previous years, no unremitted profits were hedged with foreign exchange contracts.
The Group decided in 1998 to align approximately the currency composition of its core borrowings in US dollars, euros and sterling with the split between those currencies of its forecast operating profit. This policy aims to dampen the impact of changes in foreign exchange rates on consolidated interest cover and earnings. Long-term core borrowing is now limited to these three major currencies. However, the Group still borrows small amounts in other currencies, typically for seasonal working capital needs.
At the year end the split of aggregate net borrowings in its three core currencies was US dollar 80%, euro 9% and sterling 11%. On a pro forma basis, taking into account the Lazards disposal and the e650m bond issue, the respective percentages were US dollar 76%, euro 15% and sterling 9%.
european monetary union : Our businesses in continental Europe have found that the euro has simplified trading, while presenting little or no operational or competitive difficulty. All UK operations have contingency plans in the event that the UK decides to join the euro-zone. The financial costs of preparations for the euro have not been material to the Group.
accounting policies : The significant accounting policies of the Group are shown in note 1. During the year FRS12 Provisions, Contingent Liabilities and Contingent Assets, has been implemented. This standard more closely aligns the timing of a charge with the period in which those amounts provided are actually paid as well as requiring additional disclosures. FRS15 Tangible Fixed Assets will be adopted in the 2000 accounts but it is not expected to have a significant impact on either the results or the disclosures.
risk management : The Group control department, which has an independent reporting line to the audit committee, checks effectiveness at managing risk. Through regular audits and reviews, it seeks to identify under-managed risks, and then works with the responsible line management to resolve any issues arising. Group control monitors progress against plans to ensure risks are mitigated.
All the main operating companies in the Group are visited regularly by members of the Group control department. Smaller companies not visited are required to complete control and risk assessment questionnaires. Responses are monitored by the Group control department in conjunction with the division and appropriate actions are taken to mitigate any under-managed risks.