Country risk

One of the Group’s strategic priorities is to achieve international market leadership. This involves, notably, selective though rapid expansion in emerging markets. As these markets are characterized by a low level of household equipment and strongly growing consumer demand, they offer real potential for the Group’s development. However, they also present a certain instability (political, monetary or economic) with a level of risk that could have an impact on the Group’s business performance and financial situation.

Using a methodology based on national debt rating by Standard & Poor’s, and taking account of 2006 and 2007 sales, country risk at 15 January 2008 is rated as follows:

Level of risk	Countries whose national debt(in local currency) is rated between	Proportion of 2006 sales (%)	Proportion of 2007 sales (%)
Low	AAA et BBB-	85.0	92.5
Medium	BB+ et B-	13.8	6.0
High	CCC+ à D-	1.2	1.5

According to this rating system, if we consider only countries where the Group has established a certain presence, the level of risk is considered medium for Argentina, Venezuela, Turkey and Ukraine. The rating changed from medium to low-risk for Brazil which is a large and growing market for the Group. However, Iran which was considered a medium-risk country in 2006, was rated high-risk in 2007, along with Syria, Jordan and the Palestinian Territories.


The proportion of sales in low-risk countries rose between 2006 and 2007, substantially reducing our exposure in medium-risk countries. This followed from the Group’s strong sales growth in Europe and many emerging markets which are considered politically quite stable (Central European countries, Russia and Colombia, among others), and the improved rating of Brazil. The share of high-risk countries was unchanged, but these account for sales of just €42 million, or 1.45% of Groupe consolidated sales. 


Risks relating to sold products 

Groupe SEB is exposed to the risk of warranty or civil liability claims by clients or consumers, and reasonable provision has been made for these. The gradual introduction of a two-year guarantee for small electrical appliances in European Union countries has been taken into account in Warranty provisions since the end of 2005 (for countries already concerned). To cover the risk of a defective product causing damage, Groupe SEB has subscribed to a civil liability policy (see the Insurance heading below).


Moreover, the new obligation to take account of the recovery and recycling of products at the end of their life-cycle imposes new constraints and financial challenges. The European Directive 2002/96/CE on Waste Electrical and Electronic Equipment (WEEE) which has been implemented in most European countries since the end of 2005, makes it obligatory to recover and recycle electrical and electronic appliances at the end of their life-cycle. In force in France since mid-November 2006, this recovery and recycling process is financed entirely by manufacturers and distributors for so-called ‘new’ products (brought to market after 13 August 2005). Great Britain and Italy began this process in 2007.

The financial contribution of producers to the costs of processing so-called ‘historical’ waste (i.e., products brought to market before 13 August 2005) applies pro rata to the volume of electrical and electronic equipment that they put on the market during the year of waste collection.

Consumers in certain countries are also required to contribute to the cost of recycling ‘historical’ waste by means of a recycling fee which is clearly marked on the sale price label of products, and this until 2011.

In the European countries concerned by this Directive, Groupe SEB decided to participate in eco-organizations which will handle the recycling of ‘new’ and ‘historical’ waste on behalf of manufacturers. The obligation to collect and process WEEE is pro rata to the equipment put on the market during the year of collection, and is payable in advance. In consequence, there is no need to make provisions for this at the time of putting the electrical products on the market.

The collection and processing of waste in France is handled for Groupe SEB by Eco-Systèmes, an eco-organization created in 2005 in which the Group holds a share of the capital. The contribution paid to this eco-organization in 2007 was €6.3 million. 


Risks relating to brands assets

Groupe SEB business is built on a powerful portfolio of brands, some of which are treated as assets in the balance sheet. Under the new IFR accounting standards, the value of these brands should be reviewed annually to check consistency between the value entered in the balance sheet and the actual market performance of a brand. A significant disparity due, for example, to a brand’s commercial underperformance may result in a partial or total depreciation of the book value of the asset. 


Risks relating to competition

Western markets in which Groupe SEB operates – notably Europe and North America – are highly competitive and are driven more by the market offer than by demand. Groupe SEB is long established in these markets where it occupies strong front-rank positions. Under constant competitive pressure from international groups, local operators, retailer brands and no-brand products, the Group defends its leadership and, where possible, strengthens its positions:

• by exploiting the reputation of its brands;
• by enlarging its product offer;
• by resolutely pursuing its strategy of innovation;
• by promoting brand/product ‘couples’ via marketing and advertising campaigns.


The Group’s ability to develop and launch an innovation at the right time is thus of vital importance. The introduction of a new concept acclaimed by consumers can have a powerful and lasting effect on an entire family of products, with a major impact on sales – very positive for the owner of the breakthrough innovation, but highly negative for rivals. So, Groupe SEB strives to limit this risk by continually investing in research and development in order to stay ahead and lead the market. Last year was a highly fertile year for Groupe SEB innovation which generated several major commercial successes and substantial market-share gains. 
 

Industrial risk

Groupe SEB places the safety of its production facilities at the centre of its industrial policy. In practice, this means that its factories, based mainly in Europe, are exposed to little or no major risk of natural disaster such as hurricanes or earthquakes.

Moreover, the plants themselves do not present any particular hazard, as the major part of Groupe SEB production involves assembly. While the probability of risk in assembly operations is low, the Group takes every precaution to reduce its likelihood. Other industrial processes include metal stamping (for pressure cookers, frying pans and saucepans), surface coating (e.g., for nonstick cookware), and the manufacture of some components which concern less than 10% of factory staff. The more sensitive processes are closely monitored.

The Group also gives priority to safeguarding the environment in the context of an eco-production policy involving, for example, ISO 14001 certification of its factories around the world. By the end of 2007, 89% of its plants had obtained this certificate, and the Group’s short-term aim is that this should apply to all the plants which have been part of the Group for more than five years.

Raw materials risk

Groupe SEB is exposed in the course of its operations to the risk of fluctuating prices for raw materials, particularly of metals such as aluminium and stainless steel. To protect itself against adverse price-swings which could appreciably affect procurement costs, the Group covers its orders to suppliers with financial hedging instruments which can for example help it to spread the impact of changing aluminium, nickel and copper prices over time. The upward trend in prices observed since the end of 2005, which steepened in 2006, continued but was somewhat less marked in 2007. However, the Group had to cope with further substantial price increases of several raw materials which are important for its manufacturing – notably aluminium (an average of +6.8% for the Group), stainless steel (an average of +33.8% for the Group), and copper (+6%). To compensate for this, the Group was led to increase the prices of its products. Sourced products were also affected as their prices were increased by suppliers and sub-contractors.

The above raw materials weigh differently in the Group’s overall purchasing costs. For example, in 2007 aluminium accounted for a little over 17% of direct purchases for factories (up on the 12% average in recent years). Direct buying of plastics accounted for 6% of purchases and steel 7%. Higher raw materials costs raised the Group’s purchasing index to 102.4, despite our active hedging policy and savings made on other value-added purchases such as metal and plastic parts, electrical and electronic components and glass.

In addition to the impact of higher raw materials prices, the strong rise in oil prices (an average of +11%) pushed up the cost of road and water transport in 2007.

Experts forecast a stabilization of metal prices for 2008, though at still high levels: nickel (used in stainless steel) at $28,000 a tonne in January 2008, against $15,000 in 2005; aluminium and copper could remain at respectively $2,400 and $7,000 a tonne. Oil prices are expected go on rising, which would have a negative impact on plastics, production costs and transport. In any event, the Group will pursue its rigorous purchasing policy and, by exploiting potential savings on other raw materials and supplies, will spare no effort to limit the escalation of purchase costs. It will continue to exploit systematic competitive bidding between suppliers, make greater use of dollar purchases and sourcing in low-cost countries, explore buying further downstream in the value-added chain, and examine contingency plans to develop the use of other materials. At the end of January 2008, the Group had covered about 87% of the aluminium needs of its cookware factories for the next 12 months. Commodity risks are dealt with in notes 1.4.4. and 26 to the Consolidated Financial Statements.

Risks relating to information systems

The Group continues to deploy a coherent IT system in all its subsidiaries to ensure better management and client service and to minimize the innate risks of obsolete local systems. It concentrates its IT budget on a limited number of software packages which it uses selectively throughout the Group, depending on the size of each subsidiary (SAP R/3 for larger entities, or those participating in clusters, and SAP Business One for more compact entities). This targeted deployment reduces setting-up and operating risks.

The installation of these IT systems may briefly perturb the quality of client service. If there are breakdowns, these could involve loss of data, errors or delays that impede the proper functioning of the company and affect its results. Thorough testing prior to the start-up of new systems and a strict IT security policy (monitored by a steering committee) aim to ensure that systems are fully reliable, secure and accessible. The Group regularly organizes campaigns to increase employee awareness of IT security. 


Labour relation risks

Groupe SEB is constantly adapting its structures, particularly its factories, to ensure that it remains competitive. Despite a responsible approach to restructuring, plant closures are a serious and disagreeable task which can affect our relations with our employees, and could even involve labour disputes with repercussions for the Group’s operations, performance and results.

In January 2006, the Group announced an industrial restructuring plan in France which would require the closure of three factories and the rescaling of a fourth, involving 890 employees. This announcement and the measures taken within the affected plants had a disruptive effect on operations in 2006 and 2007. Determined to carry out this plan in a responsible way and in accordance with its commitments to staff, the Group has striven in the last two years to find solutions for every employee concerned. Special units were set up to oversee this process and propose solutions such as career re-orientation, internal mobility, age-related measures, and help with personal projects. This was aimed to ensure that no employee would be abandoned and left without support in solving his or her employment problem. In parallel, the Group managed to ensure the reindustrialization and conversion of sites by helping new operators to set up business activities and create jobs at the sites concerned. 


Risks relating to acquisitions

Over the last 40 years, Groupe SEB has developed through organic growth and acquisitions. Today, it continues to play a key active role in consolidating the still-fragmented small household equipment sector.

External growth requires an ability to effectively integrate new acquisitions and generate synergies. With its many acquisitions over the years, Groupe SEB has built up experience in integrating newly acquired companies. In the last five years, for example, it integrated Moulinex-Krups in 2001-2002 and All-Clad in 2004, Panex and Lagostina in 2005, and is currently integrating and harnessing the synergies of Mirro WearEver to turn it back into a profitable business as soon as possible. However, despite all the resources and efforts deployed, immediate success is never guaranteed. Failure or delays could affect the Group’s results.

The Group’s acquisition of a majority stake in the Chinese company, Supor, which will be fully consolidated from 2008, presents major challenges: different cul