Risk management
The Group constantly monitors the financial risks to which it is exposed, in order to assess potentially negative effects in advance and to take appropriate corrective measures with the aim of eliminating or, at the least, limiting the negative effects deriving from the risks in question.
The risks to which the Group is exposed are managed centrally on the basis of hedging policies that may also include the use of derivative instruments with the aim of minimizing the effects deriving from exchange rate (especially in relation to the US dollar) and interest rate fluctuations.
The operations of the Safilo Group are subject to various financial risks, in particular:
The Group strives to reduce the risk relating to the insolvency of its customers by, as far as possible, avoiding sales to customers that are not deemed reliable and solvent. The relative assessment is based on information regarding the solvency of customers and statistical historical data, and by setting limits to the exposure of each single client. However, the credit risk is mitigated by the fact that credit exposure is spread over a very large number of clients.
Positions of a significant amount for which the Group recognizes that total or partial recovery will be effectively impossible, also taking into account any guarantees obtained, as well as the charges and expenses that will have to be sustained for the attempted credit recovery, are subject to individual write-down.
The Group’s theoretical maximum exposure to the credit risk at the date of the balance sheet is represented by the book value of the financial assets.
Market risks can be divided into the following categories:
Exchange risk
The Group operates internationally and is therefore exposed to risks deriving from variations in exchange rates that may influence the value of its shareholders’ equity and financial results.
In particular, the Group is exposed to risks regarding the exchange rate between the Euro and the US Dollar, since some of the companies of the Group usually sell goods on the North American market and on other markets where the US dollar is the main currency used for business trades (Far-East).
The Group constantly attempts to reduce the impact deriving from variations in the US dollar by procuring suppliers located in areas where it is possible to buy in US dollars, thereby performing a sort of “natural hedging”. For incomes in dollars that are not compensated by expenses in dollars, the Group policy advocates the use of hedging instruments such as foreign currency contracts in dollars. Any exposure is covered by plain vanilla contracts with a duration of no more than twelve months. Information regarding the fair value and the accounting methods of derivative financial instruments are detailed in a specific paragraph of the notes to the financial statements.
Furthermore, the Group owns shareholdings in subsidiaries located in areas outside the European Monetary Union, and the variations in the shareholders’ equity deriving from variations in the exchange rates of the local currency against the Euro are recorded in a reserve of the consolidated shareholders’ equity named “conversion reserve”.
Fair value variation risk
The Group holds some assets that are subject to variations in value over time according to the variations of the market on which they are traded. This risk is predominantly concentrated within the "available for sale” portfolio and is constantly monitored by the Group through real time information regarding the assets in question.
With regard to trade payables and receivables and other current and non-current assets, it is assumed that their book value is approximately equal to their fair value.
Interest rate risk
Bank borrowings expose the Group to the risk of variations in interest rates. In particular, variable rate borrowings represent a risk of change in the cash flows, while fixed rate borrowings represent a potential variation in the fair value of the borrowings themselves.
The Group regularly assesses its exposure to the risk of variation of interest rates and manages this risk through recourse to derivative financial instruments called interest rate swaps (IRS), which are used exclusively to hedge the cash flows. The interest rate swap contracts are stipulated with primary financial institutions and, at the beginning of the hedge, the formal designation is made and the documentation relating to the hedge is prepared.
This risk could generate the inability to find the necessary financial resources to back up the operating activities at good market terms within the timeframe available. The cash flow needs for finance and liquidity of the company are constantly monitored centrally by the Group treasury, to guarantee effective and efficient management of the financial resources.
The Group has therefore adopted a series of policies and processes with the aim of optimising the management of financial resources and the management maintains that the funds and lines of credit currently available, in addition to those that will be generated by the operating and financing activities, will be sufficient to satisfy the requirements deriving from the investing activity, the working capital management and financial debts.
Sensitivity analysis
Currency
The Group is exposed to risks regarding the exchange rate between the Euro and the US Dollar, since some of the companies of the Group usually sell goods on the North American market and on other markets where the US dollar is the main currency used for business (Far-East).
The Group constantly tries to reduce the effects deriving from fluctuations in the US currency by getting its supplies from local suppliers in areas where purchases are made in American dollars and thus implementing a sort of “natural hedging”.
As far as the sensitivity analysis is concerned, note that an increase or decrease of 1% of Euro against the US Dollar would result respectively in a decrease or an increase of the net sales of around 4-5 million Euro and in a decrease or an increase of the operating profit of the Group of around 0.4-0.5 million Euro.
