Risk management

Davide Campari-Milano S.p.A. and Gruppo Campari are exposed to external risks and uncertainties arising from general or specific conditions in the industries in which they work, as well as to risks arising from strategic decisions and internal operational risks.


BUSINESS AND SPECIFIC RISKS

Risks relating to international trade and operations in emerging markets

In line with its international growth strategy, the Group currently operates in numerous markets, and plans to expand in certain emerging countries, especially in Eastern Europe, Asia and Latin America. Operating in emerging markets means that the Group is vulnerable to various risks inherent in international business, including exposure to an often unstable local political and economic environment, exchange rate fluctuations (and related hedging difficulties), export and import quotas, and limits or restrictions on investment, advertising or the repatriation of dividends.


Risks relating to the Company’s dependence on licences for the use of third-party brands and licences granted to third parties for use of the Group's brands

At 31 December 2016, 8.6% of the Group’s consolidated net sales came from production and/or distribution under license of third-party products.

Should any of these licensing agreements be terminated or not renewed for any reason, this could have a negative effect on the Group’s activities and operating results.

Risks relating to market competition

The Group is part of the alcoholic and non-alcoholic beverage segment, where there is a high level of competition and a large number of operators. The main competitors are large international groups involved in the current wave of mergers and acquisitions, which are operating aggressive strategies at global level. The Group’s competitive position vis-à-vis the most important global players, which often have greater financial resources and benefit from a more highly diversified portfolio of brands and geographic locations, means that its exposure to market competition risks is particularly significant. 

 

Risks relating to the Company’s dependence on consumer preference and propensity to spend

An important success factor in the beverage industry is the ability to interpret consumer preferences and tastes, particularly those of young people, and to continually adapt sales strategies to anticipate market trends and strengthen and consolidate the product image. If the Group’s ability to understand and anticipate consumer tastes and expectations and to manage its own brands were to cease or decline significantly, this could considerably affect its activities and operating results. Moreover, the unfavorable economic situation in certain markets is dampening the confidence of consumers, making them less likely to buy drinks.

Risks relating to legislation in the beverage industry

Activities relating to the alcoholic and soft drinks industry, production, distribution, export, import, sales and marketing, are governed by complex national and international legislation, often drafted with somewhat restrictive aims. The requirement to make the legislation governing the health of consumers, particularly young people, ever more stringent could in the future lead to the adoption of new laws and regulations aimed at discouraging or reducing the consumption of alcoholic drinks. Such measures could include restrictions on advertising or tax increases for certain product categories. Any tightening of regulations in the main countries in which the Group operates could lead to a fall in demand for its products.

Tax risks

The Group operates in many countries with different tax regulations. In many jurisdictions, distillates and wines are subject to import and excise duties, some of which could rise and negatively affect demand for Gruppo Campari products. Such changes could have a negative impact on profit margins or sales, reducing overall consumption or encouraging consumers to move to less heavily-taxed alcoholic beverage categories.

Moreover, significant changes in the international tax environment could suddenly increase overall business costs if there is a rise in the Group’s effective tax rate, and lead to uncertain and/or unexpected exposure to tax.

The Group regularly reviews its business strategy and tax policy in light of regulatory changes, and assesses the likelihood of any negative results of potential inspections in order to determine the adequacy of its tax provisions.

Risks relating to environmental policy

With regards to the risk relating to environmental policy, the Group’s industrial management has implemented dedicated procedures relating to safety and quality controls in the area of environmental pollution and the disposal of both solid and water waste. The goal of this structure is continuous monitoring and updating of the Group’s industrial activities, in compliance with the regulatory requirements for each country in which the Group operates. 

 

Risks relating to product compliance and safety

The Group is exposed to risks relating to its responsibility of ensuring that its products are safe for consumption. It has therefore put in place procedures to ensure that products manufactured in Group plants are compliant and safe in terms of quality and hygiene, in accordance with the laws and regulations in force, and voluntary certification standards. In addition, the Group has defined guidelines to be implemented if quality is accidentally compromised, such as withdrawing and recalling products from the market.

Risks relating to employees

In the various countries where the Group has subsidiaries, its dealings with employees are regulated and protected by collective labour agreements and the regulations in force locally.

Any reorganisation or restructuring undertaken, where this becomes essential for strategic reasons, is defined on the basis of plans agreed with employee representatives.

Moreover, the Group has implemented specific procedures to monitor safety in the workplace, and it is worth noting that the accident rate at Group plants is very low and that any accidents that do occur tend to be minor.

Environmental and geopolitical risks

The Group operates in around 190 countries. Production activities and the implementation of the Group’s strategies are subject to the effects of natural events and geopolitical risks. Environmental changes, some of which could have a significant impact, could interfere with the local supply chain, as well as harm some customers. These events are generally unpredictable and can influence the seasonality of sales, just as natural events (e.g. hurricanes) can damage products and interrupt production at some plants. Some weather conditions might also have a positive effect on some geographical regions, but a negative effect in other segments.

The Group monitors environmental and geopolitical risks, has emergency plans in place and continuously develops plans to deal with such crises. The Group counts compliance with regulations and with local and international standards among its priorities, together with business continuity assessment, back-up scenarios and global insurance policies.

Risk of failure to comply with laws and regulations

As the Group is exposed and subject to numerous different regulations, there is a risk that failure to comply with laws and regulations, as well as with the Group’s policies, could harm its reputation and/or lead to potentially substantial fines. To mitigate this risk, the Group has created a Code of Ethics and defined Rules of Business Conduct. It also provides its employees with regular training on its global policies. Internal assurance activities are continuously monitored and assessed with local management in order to improve the internal control system.

Exchange rate and other financial risks

Around 56.5% of the Group’s consolidated net sales in 2016 came from outside the European Union.

With the growth in the Group’s international operations in areas outside the eurozone, a significant fluctuation in exchange rates could hit the Group’s activities and operating results.

However, the establishment of Group entities in countries such as the United States, Brazil, Australia, Argentina, Russia and Switzerland allows this risk to be partly hedged, given that both costs and income are denominated in the same currency.

Therefore, exposure to foreign exchange transactions generated by sales and purchases in currencies other than the Group’s functional currencies represented an insignificant proportion of consolidated sales in 2016.

 

FINANCIAL RISKS

The Group’s main financial instruments include current accounts, short-term deposits, short and long-term bank loans, finance leases and bonds. The purpose of these is to finance the Group’s operating activities. In addition, the Group has trade receivables and payables resulting from its operations. The main financial risks, to which the Group is exposed, are market (currency and interest rate risk), credit and liquidity risk. These risks are described below, together with an explanation of how they are managed. To cover these risks, the Group makes use of derivatives, primarily interest rate swaps, cross currency swaps and forward contracts, to hedge interest rate and exchange rate risks. 

Credit risk

With regard to trade transactions, the Group works with medium-sized and large customers (mass retailers, domestic and international distributors) on which credit checks are performed in advance.

Each company carries out an assessment and control procedure for its customer portfolio, by constantly monitoring amounts received. In the event of excessive or repeated delays, supplies are suspended.

As a result, historical losses on receivables represent a very low percentage of revenues and annual outstanding receivables and do not require special coverage and/or insurance.

The maximum risk at the reporting date is equivalent to the carrying amount of trade receivables.

Financial transactions are carried out with leading domestic and international institutions, whose ratings are monitored, in order to minimise counterparty insolvency risk. The maximum risk at the reporting date is equivalent to the carrying amount of these assets.

Liquidity risk

The Group's ability to generate substantial cash flow through its operations allows it to reduce liquidity risk to a minimum. This risk is defined as the difficulty of raising funds to cover the payment of the Group’s financial obligations. The table below summarizes financial liabilities at 31 December 2016 by maturity based on the contractual repayment obligations, including non-discounted interest.  

31 December 2016

On demand

€ million

Within 1 year

€ million

Due in 1 to 2 years

€ millioni

Due in 3 to 5 years

€ million

Due after 5 years

€ million

Total

€ millioni

Payables and loans due to banks - 109.4 3.2 301.3   413.9
Bonds - 34.5 34.5 434.5 616.5 1,120.0
Property leases - 0.1 0.1 0.1 2.0 2.2
Other financial payables  - 7.5       7.5
Total financial liabilities - 151.5 37.8 735.9 618.5 1,543.6


 

31 December 2015

On demand

€ million

Within 1 year

€ million

Due in 1 to 2 years

€ millioni

Due in 3 to 5 years

€ million

Due after 5 years

€ million

Total

€ millioni

Payables and loans due to banks - 29.3 1.6 1.6 0.4 32.8
Bonds - 411.8 43.0 222.5 1,051.0 1,728.3

Derivatives on bond issues

- 2.8 2.8 13.1 0.0 18.7
Private placement - 103.4 8.1 8.1 105.1 224.6
Property leases - 0.1 0.1 0.1 2.0 2.2
Other financial payables  - 0.5       0.5
Total financial liabilities - 547.8 55.5 245.3 700.8 1,419.5


The Group’s financial payables, with the exception of non-current payables with a fixed maturity, consist of short-term bank debt.

Thanks to its liquidity and management of cash flow from operations, the Group has sufficient resources to meet its financial commitments at maturity.

In addition, there are unused credit lines that could cover any liquidity requirements.


 

 

MARKET RISKS

Market risk consists of the possibility that changes in exchange rates, interest rates or the prices of raw materials or commodities (alcohol, aromatic herbs, sugar) could negatively affect the value of assets, liabilities or expected cash flows.

Price risk

The price of raw materials depends on a wide variety of factors, which are difficult to forecast and are largely beyond the Group’s control. Although historically the Group has not encountered particular difficulties in purchasing sufficient high-quality raw materials, we cannot rule out the possibility that the emergence of any tensions in this area could lead to difficulties in obtaining supplies, causing costs to rise, which would have negative consequences on the Group’s financial results.

Interest rate risk

The Group is exposed to the risk of fluctuating interest rates in respect of its financial assets, payables to banks and lease agreements.

The Parent Company’s 2012 and 2015 bonds pay interest at a fixed rate.

Overall, at 31 December 2016, around 60% of the Group’s total financial debt was fixed-rate debt.


Sensitivity analysis

The following table shows the effects on the Group’s income statement of a possible change in interest rates, if all other variables are constant. A negative value in the table indicates a potential net reduction in profit and equity, while a positive value indicates a potential net increase in these items. The assumptions used, in terms of a potential change in rates, are based on an analysis of the trend at the reporting date. 
The table illustrates the full-year effects on the income statement in the event of a change in rates, calculated for the Group’s variable-rate financial assets and liabilities. With regard to the fixed-rate financial liabilities hedged by interest rate swaps, the change in the hedging instrument offsets the change in the underlying liability, with practically no effect on the income statement.

Net of tax, the effects are as follows:

 

Increase/decrease in interest rates in basis points

Income statement

 

 

Increase in interest rates 
€ million

Decrease in interest rates
€ million

31 December 2016

+/- 5 basis points

 

 

Euro

 

(0.5)

0.5

Dollar

 

0.1

(0.0)

Other currencies

 

1.1

(1.3)

Total effect

 

0.8

(0.9)

 

 

Increase/decrease in interest rates in basis points

Income statement

 

 

Increase in interest rates 
€ million

Decrease in interest rates
€ million

31 December 2015

+/- 5 basis points

 

 

Euro

 

(0.3)

0.3

Dollar

 

0.3

(0.1)

Other currencies

 

1.1

(1.3)

Total effect

 

1.2

(1.1)

Exchange rate risk

The expansion of the Group’s international business has resulted in an increase in sales in markets outside the Eurozone, which accounted for 56.5% of the Group’s net sales in 2016.

However, the establishment of Group entities in countries such as the United States, Brazil, Australia, Argentina, Russia and Switzerland allows this risk to be partly hedged, given that both costs and income are denominated in the same currency.

Therefore, exposure to foreign exchange transactions generated by sales and purchases in currencies other than the Group’s functional currencies represented an insignificant proportion of consolidated sales in 2016. For these transactions, Group policy is to mitigate the risk by using forward sales or purchases.

Lastly, it should be noted that exchange rate risk was further reduced in 2016 with the early repayment of the private placement issued by Campari America.

 

Sensitivity analysis

The analysis was performed on the economic effects of a possible change in the exchange rates against the euro, keeping all the other variables constant.

This analysis does not include the effect on the consolidated financial statements of the conversion of the financial statements of subsidiaries denominated in a foreign currency following a possible change in exchange rates.

The assumptions adopted regarding a potential change in rates are based on an analysis of forecasts provided by financial information agencies at the reporting date.

The types of transaction included in this analysis are sales and purchase transactions in a currency other than the Group’s functional currency.

The effects on shareholders’ equity are determined by changes in the fair value of forward contracts on future transactions, which are used as cash flow hedges.

The results of this analysis showed that the effects would not be significant.

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Last updated Apr 27 2017