2012 Half year financial report

This attachment provides information about financial instruments, their risks, as well as the sensitivity analysis in accordance with the requirements of IFRS 7, effective as of 1 January 2007.

As of 30 June 2012 and as of 31 December 2011, the financial instruments in force were allocated as follows within the Piaggio Consolidated Group Financial Statements.

In thousands of Euros  Notes As of 30 June 2012 As of 31 December 2011 Change
         
Assets        
         
Non-current assets        
Other financial assets 20 15,850 11,639 4,211
of which from the measurement of derivatives   15,850 11,639 4,211
         
         
Liabilities        
         
Non-current liabilities        
Financial liabilities falling due after one year 30 383,035 329,200 53,835
of which bonds   192,708 191,859 849
of which bank financing   163,584 112,768 50,816
of which leasing   6,282 6,745 (463)
of which other lenders   5,191 6,153 (962)
         
of which the fair value of hedging derivatives   15,270 11,675 3,595
         
Current liabilities        
Financial liabilities falling due within one year 30 123,579 170,261 (46,682)
of which bank financing   85,962 145,377 (59,415)
of which leasing   915 894 21
of which other lenders   36,702 23,990 12,712
     

Current and non-current liabilities

Current and non-current liabilities are covered in detail in the section on financial liabilities of the notes, where liabilities are divided by type and detailed by expiry date.

Financial Risks

The financial risks the Group is exposed to are liquidity risk, exchange risk, interest rate risk and credit risk.

The management of these risks is centralised and treasury operations take place in accordance with formal policies and guidelines which are applicable to all Group companies.

Liquidity risk and capitals management

The liquidity risk arises from the possibility that available financial resources are not sufficient to cover, in due times and procedures, future payments arising from financial and/or commercial obligations. To deal with these risks, cash flows and the Group’s credit line needs are monitored or managed centrally under the control of the Group’s Treasury in order to guarantee an effective and efficient management of the financial resources as well as optimise the debt’s maturity standpoint.

In addition, the Parent Company finances the temporary cash requirements of Group companies by providing direct short-term loans regulated in market conditions or guarantees.

As of 30 June 2012 the most important credit lines irrevocable until maturity granted to the Parent Company were as follows:

  • revolving loan of €/000 200,000 due in December 2015;
  • revolving loan of €/000 40,000 due in June 2013;
  • revolving loan of €/000 20,000 due in November 2013;
  • debenture loan of €/000 150,000 due in December 2016;
  • debenture loan of $/000 75,000 due in July 2021;
  • a loan of €/000 85,714 due in February 2016;
  • a loan of €/000 9,375 due in September 2013;
  • a loan of €/000 15,000 due in December 2012;

Other Group companies had the following irrevocable credit lines:

  • a loan of $/000 36,850 due in July 2019
  • a loan of $/000 19,680 due in July 2018

As of 30 June 2012, the Group had a liquidity of €/000 107,340, undrawn irrevocable credit lines of €/000 209,335 and revocable credit lines of €/000 168,941, as detailed below:

In thousands of Euros
As of 30 June 2012
As of 31 December 2011
Variable rate with maturity within one year - irrevocable until maturity 39,000 100,000
Variable rate with maturity beyond one year - irrevocable until maturity 170,335 4,100
Variable rate with maturity within one year - cash revocable 134,941 180,045
Variable rate with maturity within one year - with revocation for self-liquidating typologies 34,000 20,700
Total undrawn credit lines 378,276 304,845
   

Exchange Risk

The Group operates in an international context where transactions are conducted in currencies different from Euro. This exposes the Group to risks arising from exchange rates fluctuations. In 2005, the Group adopted an exchange rate risk management policy which aims to neutralise the possible negative effects of the changes in exchange rates on company cash-flows.

This policy analyses:

  • The exchange risk: the policy wholly covers this risk which arises from differences between the recognition exchange rate of receivables or payables in foreign currency in the financial statements and the recognition exchange rate of actual collection or payment. To cover this type of exchange risk, the exposure is naturally offset in the first place (netting between sales and purchases in the same currency) and if necessary, by signing currency future derivatives, as well as advances of receivables denominated in currency.

As of 30 June 2012, Piaggio & C. S.p.A. had undertaken the following forward purchase contracts (recognised based on the regulation date):

  • for a value of CAD/000 830 corresponding to €/000 646 (valued at the forward exchange rate), with average maturity on 25 July 2012;
  • for a value of GBP/000 7,140 corresponding to €/000 8,920 (valued at the forward exchange rate), with average maturity on 10 August 2012;
  • for a value of JPY/000 375,000 corresponding to €/000 3,655 (valued at the forward exchange rate), with average maturity on 10 July 2012;
  • for a value of SEK/000 850 corresponding to €/000 96 (valued at the forward exchange rate), with average maturity on 31 July 2012;
  • for a value of USD/000 9,010 corresponding to €/000 7,138 (valued at the forward exchange rate), with average maturity on 6 July 2012;

and forward sales contracts:

  • for a value of CAD/000 1,550 corresponding to €/000 1,193 (valued at the forward exchange rate), with average maturity on 12 August 2012;
  • for a value of GBP/000 6,730 corresponding to €/000 8,302 (valued at the forward exchange rate), with average maturity on 16 August 2012;
  • for a value of JPY/000 30,000 corresponding to €/000 30 (valued at the forward exchange rate), with average maturity on 31 July 2012;
  • for a value of SEK/000 9,000 corresponding to €/000 1,004 (valued at the forward exchange rate), with average maturity on 16 August 2012;
  • for a value of USD/000 3,540 corresponding to ?/000 2,760 (valued at the forward exchange rate), with average maturity on 16 August 2012.

Details of other operations ongoing at other Group companies are given below:

  • for PT Piaggio Indonesia forward purchase contracts for €/000 1,250, with average maturity on 3 August 2012;
  • for Piaggio Vehicles Private Limited forward purchase contracts for USD/000 1,100 with average maturity on 31 July 2012, for JPY/000 170,690 with average maturity on 2 July 2012 and for €/000 2,000 with average maturity on 31 July 2012. As regards sales, contracts for USD/000 1,076 with average maturity on 31 July 2012.
  • The settlement exchange risk: arises from the conversion into Euro of the financial statements of subsidiaries prepared in currencies other than the Euro during consolidation. The policy adopted by the Group does not require this type of exposure to be covered.
  • The business risk: arises from changes in company profitability in relation to annual figures planned in the economic budget on the basis of a reference change (the "budget change") and is covered by derivatives. The items of these hedging operations are therefore represented by foreign costs and revenues forecast by the sales and purchases budget. The total of forecast costs and revenues is processed monthly and relative hedging is positioned exactly on the average weighted date of the economic event, recalculated based on historical criteria. The economic occurrence of future receivables and payables will occur during the budget year.

As of 30 June 2012, the Group had undertaken the following hedging transactions on the exchange risk:

  • forward purchase contracts for a value of CNY/000 64,000 corresponding to €/000 7,315 (valued at the forward exchange rate), with average maturity on 16 September 2012;
  • forward sales contracts for a value of GBP/000 4,900 corresponding to €/000 5,886 (valued at the forward exchange rate), with average maturity on 21 August 2012;

To hedge the business risk alone, cash flow hedging is adopted with the effective portion of profits and losses recognised in a specific shareholders' equity reserve. Fair value is determined based on market quotations provided by main traders.

As of 30 June 2012 the total fair value of instruments to hedge the exchange risk accounted for on a hedge accounting basis was equal to €/000 525. During the period, profits under other components of the Statement of Comprehensive Income were recognised amounting to €/000 147 and losses from other components of the Statement of Comprehensive Income amounting to €/000 205 were reclassified to profits/losses for the period.

The net balance of cash flows during the first half of 2012 in main currencies is shown below:

In millions of Euro 
 Cash Flow 1st half of 2012  
Pound Sterling    14.1 
Indian Rupee   (38.0) 
Croatian Kuna    1.8 
US Dollar   7.3 
Canadian Dollar    4.0 
Swiss Franc   (1.1) 
Vietnamese Dong    8.1 
Chinese Yuan
 (25.1) 
Japanese Yen   (4.9) 
Total cash flow in foreign currency    (33.8) 
1 Cash flow in Euro

In view of the above, assuming a 3% increase in the average exchange rate of the Euro on the unhedged portion of cash flows in main currencies observed during the first half of 2012, consolidated cash flow would have increased by approximately €/000 986.

Interest rate risk

This risk arises from fluctuating interest rates and the impact this may have on future cash flows arising from financial assets and liabilities. The Group regularly measures and controls its exposure to interest rates changes and manages such risks also resorting to derivative instruments, mainly Interest Rate Swaps and Cross Currency Swaps, as established by its own management policies.

As of 30 June 2012, the following hedging derivatives were taken out:

  • Interest Rate Swap to hedge the variable rate loan for a nominal amount of €/000 117,857 (as of 30 June 2012 for €/000 85,714) granted by the European Investment Bank. The structure has fixed step-up rates, in order to stabilise financial flows associated with the loan; in accounting terms, the instrument is recognised on a cash flow hedge basis, with profits/losses arising from the fair value measurement allocated to a specific reserve in shareholders' equity; as of 30 June 2012, the fair value of the instrument was negative by €/000 3,807;
  • A cross currency swap to hedge the private debenture loan issued by the Parent Company for a nominal amount of $/000 75,000. The purpose of the instrument is to hedge both the exchange risk and interest rate risk, turning the loan from US dollars to Euro, and from a fixed rate to a variable rate; the instrument is accounted for on a fair value hedge basis, with effects arising from the measurement recognised as profit and loss. As of 30 June 2012, the fair value of the instrument was €/000 12,757. The net economic effect arising from the measurement of the instrument and underlying private debenture loan was equal to €/000 171;
  • a cross currency swap to hedge a loan relative to the Indian subsidiary for $/000 29,000 granted by International Finance Corporation. The purpose of the instrument is to hedge the exchange risk and interest rate risk, turning the loan from US dollars to Indian Rupees, and a third of said loan from a variable rate to a fixed rate; As of 30 June 2012, the fair value of the instrument was €/000 3,020.
  • a cross currency swap to hedge a loan relative to the Vietnamese subsidiary for $/000 19,680 granted by International Finance Corporation. The instrument hedges the exchange risk and partially the interest rate risk, turning the variable loan in US dollars to a fixed rate loan in Vietnamese Dong, except for a minor portion at a variable rate (one fourth). As of 30 June 2012, the fair value of the instrument was negative by €/000 272.

In thousands of Euros  Fair Value
Piaggio & C. S.p.A.  
Interest Rate Swap (3,807)
Cross Currency Swap 12,757
Piaggio Vehicles Private Limited  
Cross Currency Swap 3,020
Piaggio Vietnam  
Cross Currency Swap (272)
   

As of 30 June 2012, variable rate debt, net of financial assets and considering hedging derivatives, was equal to €/000 90,326. Consequently a 1% increase or decrease in the Euribor above this net exposure would have generated higher or lower interest of €/000 903 per year.

Credit risk

The Group considers that its exposure to credit risk is ad follows:

 

In thousands of Euros    As of 30 June 2012    As of 31 December 2011  
Liquid assets    101,275   151,394 
Securities   5,993   441 
Financial receivables      
Trade receivables 
 140,956   65,560 
Total   248,224   217,395 
 

The Group monitors or manages credit centrally by using established policies and guidelines. The portfolio of trade receivables shows no signs of concentrated credit risk in light of the broad distribution of our licensee or distributor network. In addition, most trade receivables are short-term. In order to optimise credit management, the Company has established revolving programmes with some primary factoring companies for selling its trade receivables without recourse in Europe and the United States.

Hierarchical fair value valuation levels

As regards financial instruments recorded in the balance sheet at fair value, IFRS 7 requires these values to be classified on the basis of hierarchical levels which reflect the significance of the inputs used in determining fair value. These levels are as follows:

  • level 1 – quoted prices for similar instruments;
  • level 2 – directly observable market inputs other than Level 1 inputs;
  • level 3 – inputs not based on observable market data.

The table below shows the fair value of hedging derivatives and relative hedged items as of 30 June 2012, by hierarchical measurement level.

 

 In thousands of euro
Level 1
Level
2
Level
3
       
Other assets - Financial hedging derivatives   15,835 15
Other assets   785  
Total   16,620 15
       
       
Hedging financial derivatives   (58) (287)
Financial liabilities at fair value recognised as profit or loss.   (66,724)  
Other liabilities   (4,035)  
Total   (70,817) (287)
       
Accrued liabilities on hedging derivatives and relative hedged items measured at fair value   (1,780) (1,375)
       
Total   (55,977) (1,647)
     

Hierarchical level 3 includes items transferred from level 2 and refers to the measurement of the cross currency swap taken out for the Vietnamese subsidiary. This classification reflects the illiquiity of the local market, which does now allow for a valuation based on conventional criteria. If valuation techniques typical of local markets had been adopted, which is not the case for the Vietnamese financial market, derivatives would have had a negative fair value totalling €/000 3,006, rather than €/000 272 (included under financial hedging instruments - level 3, equal to a total of €/000 287) and accrued liabilities on financial hedging instruments equal to €/000 1,148.

The table below shows Level 2 changes occurring in the first half of 2012:

In thousands of Euros  Level 2
Balance as of 31 December 2011 (54,241)
Profit (loss) recognised in the consolidated income statement (205)
Increases/(Decreases) 249
Balance as of 30 June 2012 (54,197)