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Risk management


Groupe SEB pursues a policy of prudent management of the risks inherent in its business, having consideration for the interests of all its stakeholders – clients, consumers, shareholders, employees – and for the environment.
This approach is based on a detailed mapping and analysis of the main risks faced by the company, which makes it possible to rank them on the basis of their potential impact on the functioning or performance of the Group, and on the probability of such risks occurring.


 
Summary
1 : Risk relating to operations
2 : Dependency risks
3 : Legal risks
4 : Financial market risks
5 : Sensitivity analysis
6 : Insurance
7 : Exceptional events and litigation
Details
1 : Risk relating to operations

 

Country risk

 

One of the Group’s strategic priorities is to achieve international market leadership. This involves, notably, selective though energetic expansion in emerging markets. These markets are characterized by a low level of equipment in small electrical appliances and cookware, and strongly growing demand based largely on the rapid emergence of a middle class eager to spend. They offer real potential for the Group’s development over the long term, independently of economic ups and downs. Such countries 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 2007 and 2008 sales, country risk at 9 January 2009 was rated as follows:


 

Level of risk

Countries whose national debt(in local currency) is rated between

Proportion of 2007 sales
(%)

Proportion of 2008 sales
(%)

 Low

AAA et BBB-

92.50

90.70

 Medium

BB+ et B-

6.00

8.10

 High

CCC+ à D-

1.50

1.20

 

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 Turkey, Ukraine, Argentina and Venezuela. Firm sales growth in these four countries in 2008, and Colombia’s entry into the medium-risk category after a slight downgrading by Standard & Poor’s, explain the increase of just over 2 points in the Group’s exposure in markets where risk is considered moderate. There is no change in the high-risk category which, for the Group, still includes Iran, Syria, Jordan and the Palestinian territories.


The exit of Colombia from the low-risk category, along with relatively weaker growth in markets such as Brazil, Russia and Europe, explain the Group’s reduced exposure in this category. It will be noted that a slightly lower rating of Brazil, Mexico, Thailand and Russia does not affect the low-risk classification of these countries.


The present economic crisis is likely to substantially affect certain countries, which could lead to the downgrading of some of the Group’s markets in 2009. 



Risks relating to sold products


Risks of warranty or liability claims

 

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).


Recovery and recycling of end-of-use products

 

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. This imposes new financial constraints on the industry.


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 prorata 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.

 

 

Risks relating to brand assets


Groupe SEB business is built on a powerful portfolio of brands, some of which are treated as assets in its balance sheet. The total book value of its brands amounts to €294 million, and concerns mainly Rowenta, All-Clad, Lagostina and Supor.


Moreover, as Groupe SEB regularly engages in external growth operations, goodwill is shown in the consolidated financial statements for an amount of €420 million, most of this having been taken into account at the time of the All-Clad and Supor acquisitions.

 
Under IFR standards, the value of brands and goodwill must be reviewed annually to check consistency between the value entered in the balance sheet and the actual performance of the brands and the subsidiaries in their own markets. Any significant disparities, notably with regard to expected cash flow, a brand’s commercial under-performance, or increased costs incurred by the subsidiaries concerned, could require an adjustment in the balance sheet which may involve a partial or total depreciation of the book value of the asset. As there is an increased risk of brand values being affected by the present world economic crisis and its impact on consumer demand, the Group will be all the more vigilant in its management of newly-integrated companies. Meanwhile, the Group will continue its R&D drive to bolster its offer with innovative and groundbreaking products, as well as its spending on advertising and marketing to dynamize sales and build further on the market share gains it made in 2007 and 2008. However, at present, the Group does not expect the economic crisis to affect the long-term value of its intangible assets such as brands and goodwill.


Additional details are given in Note 11 to the Consolidated Financial Statements.

 
Risks relating to competition

 

In recent years, the competitive context has become more severe in both mature and emerging markets, though challenges differ in both.


Mature markets, already with a high level of equipment, are driven more by the product offer than by demand, and are characterized by an ’hour-glass’ structure where the mid-range segment has contracted, to the benefit of increased volume in top-range and entry-level segments in recent years.


Competition is particularly lively, with leading international, regional or national brands selling alongside cheap no-brand products while retailer own-brand products are on the increase. In fact, retail chains often play a catalyst role in
competition. Groupe SEB is long-established and occupies strong front-rank positions in mature markets thanks in particular to its powerful brand portfolio and extensive offer which allows it to cover all segments.

 
Emerging countries are mainly first-time buyer markets, where the rise of a new middle class with greater purchasing power is stoking demand across a broadening spectrum of products. This trend is relayed by the growing presence of modern retailing formats. Aware from the start that these countries had high potential and that their consumers sought status through products, top brands built up strong positions – in particular Groupe SEB, which holds leadership in many of these countries today. These markets have a pyramid structure, with a broad though not very deep base in entry-level products, a substantial mid-range section, and a top-range niche segment. Competition in these markets is also well developed and increasingly resembles the profile of mature markets.


It is essential in this severely competitive context to gain market share. This can be achieved by brand reputation and the relevance of the product offer, spurred by innovation and strong advertising and marketing support. 

 

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 its rivals. Groupe SEB strives to limit the risk of this competition by boosting its R&D effort in order to stay ahead and lead the market (this area has seen growing budget allocations over the last three years in both skills and investment).

Since the end of 2006, the Group has been able to profit from showcase products created by its own R&D process. It has achieved major commercial successes with these products by adding dynamism to the point-of-sale offer, thus helping the Group to stand out from its rivals and make substantial market-share gains.

 

Industrial risks

 

Groupe SEB places the safety of its production facilities at the centre of its industrial policy. In practice, this means that its European factories 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 integration of Supor since 1 January 2008 has involved a detailed review of the four Chinese factories and defi nition of priorities for potential improvement. While there are no signifi cant shortcomings in terms of the management of industrial risk, we are nonetheless gradually bringing these sites up to Group standards.

 

Raw materials risks

 

Groupe SEB operations involve the use of several major raw materials in its industrial processes: aluminium (for cookware), nickel (for certain steel alloys), copper (mainly wire for motors and electric cables), plastic (a key material in small electrical appliances) and paper or cardboard for printed documents and packaging. These materials weigh variably on the Group’s purchasing budget: aluminium accounted for about 15% of direct purchases for manufacturing in 2008 (17% in 2007), steels 6% (7% in 2007) and plastic and plastic components 22% (these figures do not include Supor).

After three years of almost uninterrupted rises in the cost of raw materials (particularly aluminium, stainless steel and copper), prices eased back in 2008, falling more sharply from the last quarter. The price of aluminium, returning from its peak level just after the summer, remained high at an average of USD 2,570 a tonne for the year, against USD 2,640 in 2007. This fall has steepened since, so that at the end of January 2009, the rate was around USD 1,300 a tonne. Nickel began to drop in May, to give an average of USD 21,027 a tonne for the year (against USD 37,180 in 2007, when it saw a peak of USD 50,000 in the spring). By the end of January 2009, nickel was selling for USD 11,100 a tonne. Copper followed the same pattern, though with a later drop (October 2008), averaging USD 6,950 for the year (USD 7,126 in 2007). By the end of January 2009, copper stood at around USD 3,200 a tonne. It should be noted that as metal quotations are in US dollars, variations in euro-dollar parity would lessen or amplify price swings. The dollar’s loss in value in 2008 had a positive effect on the Group’s purchasing of raw materials.


Exposed to the risk of fluctuating prices of these raw materials, particularly of the metals mentioned above, the Group covers its needs with multi-annual hedging operations to protect itself from sudden swings in the cost of raw materials and thus anticipate, if necessary, the need to increase its prices to its clients. This policy, which has absolutely no speculative interest for the Group can have positive results when prices are high, but negative results when prices fall. While these operations were positive for several years, they turned out to be a drawback in 2008 when faced with rapidly falling commodity prices, even if there was no material basis for this phenomenon.


At current raw materials prices, the effect of hedging is likely to be negative again in 2009, as most of the Group’s needs in aluminium, nickel and copper are already covered at rates above current prices.


Apart from this impact on raw materials, erratic oil prices led in 2008 to an increase of 35% in maritime incoming freight transport costs.


In this context, the Group’s purchasing index stood at 98.4 compared with 2007, mainly due to currency effects. At the previous year’s euro-dollar exchange rates, it would have been around 100.4.


In the current economic climate of uncertainty, it is not possible to give a clear forecast for 2009, though economic observers expect to see considerable volatility in metal prices.


The coverage and sensitivity of commodity risks are dealt with in Note 27.2.3 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 inherent 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 smaller ones). This targeted deployment reduces setting-up and operating risks.

 

Meanwhile, the introduction, on 1 January 2009, of an internally designed integrated Group Piloting System (GPS) will make it possible to quickly obtain a picture of the Group’s performance, provide more detailed breakdowns and improve internal control procedures. This far-reaching project, prepared over the last two years, involved 60 IT personnel, and as many from the Financial function, to develop the central system, interfaces and local processing. While the introduction of this worldwide system and the training of local staff to use it has been costly in terms of time and personnel, it will now ensure standardized management practices throughout the Group. The new system will be fully stabilized in 2009 when it will begin to come into general use.

 

The installation of new IT systems may briefl y affect the quality of client service. To avoid temporary breakdowns which might involve loss of data, errors or delays that could 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 relations 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 remain a serious and disagreeable task which can affect the quality of relations between the management, employees and labour unions, which could have repercussions for the Group’s operations, performance and results.

 

The industrial restructuring plan in France in 2006 and 2007 – closure of three factories, rescaling of another, 890 job-cuts – had a disruptive effect on operations but was carried out, as initially announced, fully in keeping with our ethical standards. The Group met its commitments and allocated substantial and often costly resources to ensure a solution for every employee concerned. Measures adopted, such as internal mobility, help with personal projects, help with external re-employment, age-related measures, or long-term training schemes meant that the vast majority of employees succeeded in fi nding a solution. Meanwhile, the Group managed to ensure the reindustrialization of the employment zones involved by helping to identify new operators and support the setting up of business activities to create jobs at the affected sites.

 

The announcement, on 11 February 2009, of a restructuring plan at Pont-Evêque and Erbach (with a total of 108 direct labour cuts, and 106 cuts in indirect labour) should help to restore the competitive performance of these two plants. The management once again undertook to limit outright redundancies, offering the affected employees solutions such as internal mobility, help with re-training and early retirement.

 

The Group gives high priority to the quality of ongoing dialogue with employee representatives to solve diffi cult labour issues responsibly and in the best possible conditions for everyone.

 

 

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 integrate new acquisitions effectively and generate synergies. With its many acquisitions over the years, Groupe SEB has built up experience in integrating newly acquired companies. Having integrated Moulinex-Krups in 2001-2002, it acquired All-Clad in the United States in 2004, Panex in Brazil and Lagostina in Italy in 2005 and Mirro WearEver in the United States in 2006, it went on to take majority control of the Chinese company Supor at the end of 2007. This latest operation presents major challenges: different cultures, overcoming a language barrier, a new experience for Supor personnel who now form part of a Group, the introduction of regular reporting, coordination of communications by two listed companies, and the harnessing of synergies. Several complex parallel processes, coordinated by a special steering committee, made excellent progress in 2008 – Supor’s first year of full integration within the Group – which bodes well for the future.

 

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2 : Dependency risks

Dependence on suppliers 

As part of its policy of bulk buying, Groupe SEB uses a supplier panel which numbered 312 in 2008 (much smaller than in 2007) accounting for 83% of all its European factory supplies last year. The top 50 suppliers accounted for 45% of direct production purchases, in value. On the basis of the fi gures for 2008, the biggest supplier accounted for just under 3% of total purchases, while the second and third suppliers each represented a little over 2%. These fi gures are lower than in 2007, which shows that the Group is particularly attentive to spreading its risk and limiting reliance on too few suppliers. Its priority is to ensure continuity of production in optimum economic conditions in the event of a supply failure, while maintaining healthy competition between viable suppliers.



Dependence on clients 


The retailer is Groupe SEB’s direct client, and the consumer is its final customer. Recent concentration of the big international retail chains has altered relations with these distributors, who have become more demanding with their suppliers, while seeking to reduce the cost of logistics and other services.
 
In 2008, the Group’s ten leading retail clients accounted for 35% of sales for constant structure (32% in 2007), reflecting the dynamism of specialist retail banners and a strengthening of supermarkets. The largest single client accounted for a little under 7% of total sales (slightly up on 2007), while the second accounted for a little over 6%. The Group’s international presence and the diversity of the distribution channels it uses around the world help to dilute its exposure to risk. However, despite this policy of spreading risk, the insolvency of a client at country level has consequences for the subsidiary involved. The 2008 trading year was, for example, affected by the problems of certain distributors and by the disappearance of banners such as Linen’N Things in the United States and Canada (closure of 385 stores) or Comercial Mexicana in Mexico. As it is the policy of the Group to use COFACE trade receivables cover, these defaulting clients had virtually no impact on the results. 
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3 : Legal risks

 

Risks relating to patents

Groupe SEB sells its products throughout the world with a portfolio of brands which are internationally or regionally well known. It must therefore constantly defend these brands and protect its business assets by, for example, filing patents for brands and products. These measures are not always sufficient on a global scale, as some countries offer less protection than the Group’s traditional markets in Europe and North America. As a result, sales are often ’appropriated’ by copied and counterfeited products. This obliges the Group to defend its rights by being actively vigilant in the most critical zones (China and the Middle East), by having these products seized and destroyed by the locally concerned authorities, or by taking legal action. Such measures involve costs, in addition to loss of earnings as a result of counterfeiting. For this reason, the Group works pre-emptively in collaboration with the authorities concerned to limit the impact of these practices on its business.
 
In 2008, the Group’s investment in industrial patent protection amounted to about €8 million.



 

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4 : Financial market risks

Liquidity risk

 

Groupe SEB sells its products throughout the world with a portfolio of brands which are internationally or regionally well known. It must therefore constantly defend these brands and protect its business assets by, for example, filing patents for brands and products. These measures are not always sufficient on a global scale, as some countries offer less protection than the Group’s traditional markets in Europe and North America. As a result, sales are often ’appropriated’ by copied and counterfeited products. This obliges the Group to defend its rights by being actively vigilant in the most critical zones (China and the Middle East), by having these products seized and destroyed by the locally concerned authorities, or by taking legal action. Such measures involve costs, in addition to loss of earnings as a result of counterfeiting. For this reason, the Group works pre-emptively in collaboration with the authorities concerned to limit the impact of these practices on its business.

 

In 2008, the Group’s investment in industrial patent protection amounted to about €8 million.

 

 

 

Interest rate risk and currency risk


The Group sells its products in more than 120 countries. With a substantial proportion of our manufacturing still based in Europe (42% of products sold), the Group’s business is strongly export-oriented. Exchange-rate swings thus affect our ability to be competitive, so that these must be effectively managed with the long term in view. To limit the direct impact of currency variations, the Group strives to balance incoming fl ows (such as sales revenue) and outgoing flows (such as costs) in each currency, and this, particularly in the field of procurement by diversifying sources geographically. However, this cannot fully redress imbalances, as the Group’s dollar position is short-term, while for several other currencies it is long-term. The Group also uses financial instruments to cover transaction risks.


In 2008, the volatility of exchange rates and the sudden and steep year-end fall in the value of several currencies in relation to the euro (the rouble, Korean won, Turkish pound, Mexican peso and others) seriously disrupted the trading of some of our subsidiaries in the fourth quarter, which led them to increase the sale price of products to maintain their local profitability. Continuation of these exchange levels throughout 2009 would have consequences for the Group’s sales (impact of price rises on sales volume, and exchange variations) as well as affecting its margins.

Group financing uses mostly variable-rate loans in currencies that correspond to its needs (mainly the euro and the dollar). Hedging operations covering part of the company’s debt – the longest-term extending to 2015 – make it possible for the Group to protect itself against the likelihood of interest-rate rises.

Details of exchange-rate risks are given in Notes 27.2.1 and 27.2.2 to the Consolidated Financial Statements.


Risk relating to shares


At 31 December 2008, Groupe SEB held 4,376,100 of its own shares for a total amount of €150.7 million. This treasury stock is deducted from Shareholders’ equity at acquisition cost.
On the basis of the closing price of the SEB share at 31 December 2008 (€21.46), the market value of treasury stock was €93.9 million (this market value has no impact on the Group’s consolidated fi nancial statements). An increase or decrease of 10% in the value of the SEB share would therefore involve a variation of €9.39 million in the market value of treasury stock. This variation has no impact on the consolidated income statement or shareholders’ equity.


The general slump in stockmarkets since the autumn of last year nonetheless led to huge devaluation of listed companies. Thus, in 2008, the SEB share shed almost 50% of its value, under-performing the CAC 40 Index and SBF 120 which fell by about 40%.


Further information on share risks is given in Note 27.2.4 to the Consolidated Financial Statements. This data also takes account of risk on the Supor share which is quoted on the Shenzhen stockmarket.

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5 : Sensitivity analysis

Groupe SEB conducted a sensitivity analysis of data published in 2008 to assess the impact of euro-dollar currency variations on the operating margin, and the effect of interest-rate variations on pre-tax profit. Concerning the euro-dollar exchange rate, Groupe SEB, as a regular buyer in dollars or in ’dollar zones’ (raw materials, products sourced in Asia, etc.), has held a short-term position in this currency for several years. The analysis shows that a 1% variation in the euro-dollar exchange rate would have an impact of about €3 million on the Group’s operating margin. However, other important functional currencies for the Group could equally have a significant impact on operating income. These include the yen, the rouble, the pound sterling, the Turkish pound, the Korean won, the Polish zloty, the Brazilian real and the Mexican peso. The substantial depreciation of most of these currencies in 2008, notably in the final quarter, could – if they were to remain at their starting level – continue to have a negative effect on the Group’s performance in 2009.

 

This sensitivity analysis does not take into account the impact of currency exchange variations on the competitive capacity of our European plants which still represent a large share of the Group’s production: a strong euro in relation to most other currencies, notably the US dollar, makes European manufacturing more expensive than production in dollar zones, and thus acts as a curb on exports. Conversely, the current recovery of the dollar, combined with the cost of and time taken to transport Asian imports could make our European facilities more competitive.

 

In the area of interest rates, the analysis shows that the impact on pre-tax profit of a variation of 100 base points in short-term interest rates would be €6 million.

 

Note 27.2 to the Consolidated Financial Statements gives additional details on the Group’s exposure to currency fl uctuations, interest rate swings and changes in the prices of raw materials.

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6 : Insurance

Group general insurance cover

The policy of the Group on insurance cover is to protect its assets against risks which could affect the Group. This transfer of risk to insurers is accompanied by risk protection and prevention measures. 

Worldwide insurance cover

 

Damage to property and loss of earnings

Cover for risk of damage to property and consequent loss of earnings for usual risks (fire, explosion, etc.), amounts to €200 million per loss occurrence for factories and warehouses.

This cover ceiling was calculated on the basis of maximum possible risk, in consultation with the insurers and their assessors. This valuation assumes total destruction, in a single year, of one of the Group’s main production sites. Lower thresholds are fixed for other categories of more specific or localized loss, such as risk of earthquake in certain zones where the Group has operations abroad.

This insurance cover takes into consideration additional risk protection measures at Group sites which are regularly visited by specialist risk prevention assessors from the insurance companies concerned. 

 

Civil liability 

All the Group’s subsidiaries are included in a worldwide civil liability insurance programme that covers liability relating to their operations, the products they make and the cost of recalling products.


Cover amounts are based on reasonable estimates of the risks incurred by the Group in view of its activities.

The Group also guarantees the civil liability of its management under a specific insurance policy.


Environment

 

On 1 July 2008, Groupe SEB introduced a comprehensive environment insurance programme to improve its coverage in the area of environmental risks. This covers:

  • accidental pollution, including gradual damage;
  • detriment caused to biodiversity;
  • the cost of depollution.

Transport

The Group’s transport insurance covers damage to transported merchandise for all types of transport: maritime, terrestrial or air transport anywhere in the world.

This insurance covers transport risks up to an amount of €6 million per loss occurrence.


Receivables

The Group’s subsidiaries subscribe to credit risk insurance to cover their risk on client receivables.

 

Local Insurance policies


More specific insurance policies are subscribed to locally by each of the Group’s companies, as appropriate.

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7 : Exceptional events and litigation

There were no exceptional events or litigation proceedings other than those referred to in Note 30.1 to the Consolidated Financial Statements.

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