Risks connected with the general conditions of the economy
During 2010 there was a gradual recovery in the international economy albeit with different intensities and at different rates in the various areas of the world. In the euro area, the economy continued the trend of recovery which began in the second half of 2009, benefiting from the action taken to support domestic demand and especially from the growth in exports linked to the global recovery. The recovery of the Italian economy in 2010 was however slower and more uncertain than that of the other large European countries. Despite this context of persisting economic weakness, the operating companies of the Group succeeded in reversing the negative trend of 2008-2009, reporting positive results, achieved particularly by cutting costs. However the continuing macroeconomic crisis could have a negative impact in the medium term on all the business sectors in which the Group operates.
Risks connected with the results of the Group
The CIR Group operates, among other things, in the automotive components sector, which is subject to cyclical factors, and in the media sector which is highly sensitive to the trend of the economic cycle.
It is difficult to forecast how far-reaching the economic cycles will be and how long they will last. However any macroeconomic event, such as a significant decline in a particular market, volatility in the financial markets, a rise in energy prices, the fluctuation of commodity prices etc. could have an effect on the prospects and the activities of the Group, as well as on its economic results and its financial position.
Risks connected with borrowing requirements
The CIR Group expects to be able to meet its borrowing requirements in terms of maturing loans and investment needs with its operating cash flows, available liquidity and by renewing or refinancing its loans and/or bonds and notes. Even in the current market context, the Group aims to maintain a sufficient capacity to generate funds from ordinary operations.
The Group invests any free cash flow, sharing out its investments over a suitable number of prime counterparties, mainly banks, matching the remaining life of the investments with the maturity of obligations on the funding side. However, in light of the current financial crisis, it cannot be ruled out that there may be banking and money market situations that could prevent normal financial transactions from being carried out.
Risks connected with the fluctuation of exchange rates and interest rates
A significant part of the financial debt of the Group involves the payment of financial expense calculated at floating interest rates, mainly linked to Euribor rates. Any rise in interest rates could, therefore, cause a rise in funding costs or a rise in the cost of refinancing debt entered into by the companies of the Group.
In order to limit the risk resulting from interest rate movements, the Group uses interest rate derivatives to keep rates within a predetermined range.
Some companies of the Group, particularly in the Sogefi group, do business in European countries not belonging to the euro area and in countries outside the European market and, therefore, operate in different currencies, which exposes them to foreign exchange risk against the euro. In line with its risk management policies, in order to limit this exchange rate risk the Group enters into transactions to hedge these risks.
Despite the hedging carried out by the Group in the financial markets, sharp movements in exchange rates or interest rates could have a negative impact on the economic and financial results of the Group.
Risks connected with relations with clients and suppliers
In relations with its clients, the Group manages the risk of concentration of demand by diversifying its client portfolio in a suitable way, both geographically and in terms of distribution channels. Regarding relations with suppliers the approaches are different in the different business sectors. The Sogefi Group, for example, diversifies its sourcing significantly by using several suppliers operating in different parts of the world, which enables the group to reduce its risk of commodity price fluctuation and avoid relying too heavily on key suppliers.
The utilities sector is an exception to this policy because especially in the construction of production plants the Group is exposed to risks of this kind, which it manages by requiring collateral guarantees from third parties.
Risks connected with competitiveness in the sectors in which the Group operates
The Group operates in markets which do objectively have barriers in place against the entry of new competitors due the existence of technological or qualitative gaps, to the need to make substantial initial investments and to the fact that it operates in sectors that are highly regulated requiring special authorizations from the competent authorities.
However, particularly in relation to the automotive components sector, should the group in the future not be able to develop and offer innovative and competitive products, then its economic and financial results could be negatively impacted.
Risks connected with environmental policies
The Group operates in sectors that are subject to a host of rules and regulations (local, national and supranational) on the subject of the environment, and this regulatory aspect is then often revised in a more restrictive way. The evolution of these regulations and compliance with the same could lead to very high costs with a potential impact on the profitability of the Group.
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CIR S.p.A., in its role as Parent Company of the Group, is substantially exposed to the same risks and uncertainties described above in relation to the Group.