RHIAG. Directors Report

Transcription

1 RHIAG INTER AUTO PARTS ITALIAA S.p.A. Managed and coordinated by Lanchester SA in terms of Art of the Italian Civil Code Registered office inn Bergamo, via Tiraboschi 48 A single shareholder company Share capital Euro 25,510,, Consolidated financial statements as at Directors Report Introduction Dear Shareholders, We submit for your review and approval the separate and consolidated financial statements as at 31 December 2011, prepared in accordance with International Financial Reporting Standards (IFRS). The year just ended was characterized by a macroeconomic situation that remains difficult. The effects of the financial and industrial crises that commenced in the second half of 2008 and greatly affected prior years had a serious impact on the real economy in Europe and, especially, Italy in In particular, exponential increases in thee yield on Government bonds and the lack of liquidity in the banking system made access to credit more difficult, especially for small to medium sized enterprises, leading to a fall in consumption levels. The economies of the main countries in which the Group operates recorded modest rates of GDP growth (Italia 0.7%, Switzerland d 1.8%, Czech Republic 2.1% 1 ), accompanied by increases in the level of unemployment. Historically, the aftermarket automotive sector has been characterized by an acyclic trend and stable growth. However, it has seen several key players downsize their activities, increased competition on selling pricess and problems for component manufacturers in maintaining service levels that meet the needs of the aftermarket. In this context, the Group hass maintained its strategy of consolidating itss position as Italian market leader and has again tried to develop business in Eastern Europeann countries. On the 1 Source: Organisation for Economic Co-operation and Development OECD 1

2 Italian market, the Group has continued to develop its product portfolio and range of services while improving its sales and distribution network and expanding the network of authorized repair shops. Eastern European companies have benefited from changes to a number of key members of the local management team, the reorganization of some key functions and the opening of new branches in order to achieve the necessary improvement in the level of client service; this has also involved major investment in marketing. In 2011, the Group continued with its strategy of organic growth, benefiting from the stronger market position achieved in the Czech Republic and Slovakia following the acquisition of the Auto Kelly Group in August 2010 and from its entry into the Swiss market after parent company Lanchester S.A. transferred Rhiag Group Ltd to Rhiag Inter Auto Parts Italia S.p.A. in December The Group is one of Europe s leading operators on the independent aftermarket. Indeed, it is the leading independent distributor in Italy, the Czech Republic and Slovakia and occupies strong positions in Switzerland, Hungary and Ukraine. The year 2011 has ended with consolidated gross sales of Euro million, 29.8% more than in prior year. The growth was partly due to the entry into the scope of consolidation of the Auto Kelly Group (from August 2010) and Rhiag Group Ltd (from December 2010). Assuming a like-for-like scope of consolidation (i.e. considering the results of the above transactions over the full year 2010), the increase in gross sales would have been 7.9%. Net profit for the year stood at Euro 32.5 million, up from Euro 12.6 million in prior year (Euro 18.3 million assuming a like-for-like scope of consolidation). The Group fulfilled its financial commitments during the year and, in particular, made bank loan repayments and interest payments as they fell due, while respecting all quarterly loan covenants. General information The Rhiag Group is a distributor of components for automobiles and industrial vehicles on the aftermarket, specifically in the independent aftermarket (IAM) segment. The Group is one of the European leaders in the independent aftermarket segment: it is the leading independent distributor in terms of revenues in Italy, the Czech Republic and Slovakia, third in Switzerland, third in Hungary and fifth in Ukraine. The Group also operates in Romania where its presence is more limited. The holding company is Rhiag Inter Auto Parts Italia S.p.A. (hereinafter also Rhiag S.p.A.) which holds direct investments in three companies incorporated under Italian law (Bertolotti S.p.A., Rhiag Engineering S.p.A., Consorzio Insiamo Scarl) and in two companies 2

3 incorporated under Swiss law. The first Swiss company is an operating company called Rhiag Group Ltd which operates in the independent aftermarket segment of the Swiss market while the second is Elit Group Ltd, a holding company through which Rhiag S.p.A. holds indirect interests in companies operating in Eastern Europe (Czech Republic, Slovakia, Ukraine, Romania and Hungary). Rhiag S.p.A. is wholly owned by ultimate holding company Lanchester S.A., a company incorporated in Luxembourg. The Rhiag Group structure at 31 December 2011 was as follows: Rhiag - Inter Auto Parts Italia SpA Italy 100% Rhiag Group Ltd insiamo Scarl Elit Group Ltd Bertolotti SpA Rhiag Engineering SpA Switzerland Italy Switzerland Italy Italy 100% 24% 100% 100% 100% Elit CZ spol sro Elit Slovakia sro Elit Ukraine Ltd Elit Romania Srl Lang Kft Auto Kelly AS Czech Republic Slovakia Ukraine Romania Hungary Czech Republic 100% 100% 100% 99,9931% EGL + 0,0069% RH-IAP 99.5% EGL + 0.5% RH-IAP 100% EGL Car-Go Kft Hungary Auto Kelly Slovakia SRO Slovakia 99.8% LANG+ 0.2% EGL 100% Auto Kelly AS Finally, we note that, at 31 December 2011, the Group had 2,673 employees compared to 2,452 employees at 31 December The increase compared to prior year is mainly due to the opening of new branches in Eastern European countries. 3

4 Other significant events during the reporting period At the end of the previous year, the Company began the process to have its ordinary shares listed on the Mercato Telematico Azionario ( Electronic Stock Market ) organized and managed by Borsa Italiana S.p.A. and, if requirements are met, on the STAR Segment of that market. In more detail, the proposed listing process (hereafter also Offering ) was to take place by means of a global offering divided into: (a) a public offering divided into (i) an offering aimed at the general public in Italy, excluding qualified investors and (ii) an offering to Rhiag Group employees resident in Italy; and (b) a simultaneous private placement reserved for qualified Italian investors and foreign institutional investors, possibly including any US investors in terms of Rule 144A of the United States Securities Act of Under the listing plans, the offering described above was to regard ordinary shares in the Company, partly owned by Lanchester S.A. and partly coming from a paid share capital increase with the exclusion of option rights in terms of Article 2441 (5) of the Italian Civil Code. After obtaining approval and launching the Offering, on 26 March 2011, in light of the negative performance of the Italian and international financial markets, the Company and Lanchester S.A. sole shareholder of Rhiag - Inter Auto Parts Italia S.p.A. in agreement with the coordinating institutions responsible for the placement and sponsors of the Offering, decided to withdraw the global offering. At the same time, they reviewed the measures and actions undertaken by the Company with regard to the listing of the shares on the Mercato Telematico Azionario, taking account of the fact that the basis for these measures, activities and appointments no longer applied. Significant events after the reporting period In the first few months of 2012, the Group embarked upon the process to merge subsidiaries Lang and Cargo both of which operate on the Hungarian market. This operation provided for the merger through incorporation of Cargo Kft into Lang Kft in order to simplify the 4

5 organizational structure of the two companies and achieve operating and administrative cost savings. The merger should be completed by the end of the first half of Analysis of Rhiag Group income statement performance and balance sheet and financial position The reclassified income statement of the Group for 2011 is set out in summary form below in order to provide a better understanding of the Group s performance for the year: Amounts in thousands of Euro Gross sales Direct selling costs (33.767) (26.391) Net sales ,80% 94,73% Cost of goods sold ( ) ( ) Gross profit ,61% 19,41% Distribution costs (31.538) (26.987) Administrative costs (17.938) (14.180) Other operating costs (4.384) (2.956) Amortization/depreciation of intangible assets and P,P&E (8.954) (6.942) Impairment of goodwill and other assets 0 0 Operating profit ,94% 9,20% Financial income / (expenses) (18.473) (20.910) Profit before taxation ,10% 5,02% Taxes on income (13.603) (12.316) Net profit from continuing operations ,01% 2,56% Net result from discontinued operating activities 0 (174) Net profit for the year ,01% 2,53% EBITDA Adjusted * ,22% 11,81% * EBITDA Adjusted includes gross sales less direct selling costs, cost of goods sold, distribution costs, administrative costs, other operating costs except for non-recurring costs and restructuring costs. EBITDA Adjusted is not specifically defined as a performance indicator by the IAS/IFRS adopted by the European Union. 5

6 In 2011, the Group recorded gross sales of Euro million, an increase of Euro million or +29.8% - compared to prior year. Considering a like-for-like scope of consolidation (i.e. considering the results of the extraordinary operations in 2010 for a period of 12 months), the increase in gross sales would have been Euro 47.7 million (+7.9%). Gross sales increased in all operating segments where the Group conducts its activities. In Italy, gross sales increased by Euro 7.8 million (+2.4%), as driven by Rhiag Inter Auto Parts Italia S.p.A., thanks mainly to the development of the distribution infrastructure and improvements to the product portfolio and the level of client service. In Eastern Europe, the gross sales increase of Euro million was mainly due to the effect of including Auto Kelly Group in the scope of consolidation; with a like-for-like scope of consolidation, gross sales would have increased by Euro 35.0 million (+14.2%). The sales growth was concentrated mainly in the Czech Republic, Slovakia and Romania as a result of gradual integration and penetration of the local markets where the Elit Group and the Auto Kelly Group operate jointly (Czech Republic and Slovakia) and the reorganization of local management and the distribution and logistics system (with the opening of new branches) already embarked upon in 2010 in Romania. Finally, in Switzerland, gross sales increased by Euro 39.3 million (on a like-for-like basis, there would have been an increase of Euro 5.0 million or 13.5%). Direct selling costs decreased from 5.3% of gross sales in 2010 to 5.2% in This improvement is mainly due to the lower incidence of transport on sales and agents commission. The decrease in transport on sales is attributable to the Auto Kelly Group which ships goods to customers itself, resulting in a lower percentage incidence on gross sales. Meanwhile, the decrease in the percentage incidence of agents commission is due to Swiss company Rhiag Group Ltd whose sales structure consists entirely of employees rather than agents. Cost of goods sold includes the purchase cost of goods for sale, the change in inventory, transport on purchases and personnel costs. For the year ended 31 December 2011, cost of goods sold amounted to Euro million compared to Euro million in 2010 (Euro million considering a like-for-like scope of consolidation). As a percentage of gross sales, cost of goods sold decreased from 75.3% in 2010 (75.6% considering a like-for-like scope of consolidation) to 75.2% in This improvement was the result of the combined effect of several factors. The reduction in costs for materials (including changes in inventory) as a percentage of gross sales compared 6

7 to prior year was mainly thanks to the inclusion in the scope of consolidation of the Auto Kelly Group companies which have higher margin sales (also due to sales of its own brand Starline products). Personnel costs increased by Euro 22.3 million in absolute terms, mainly because of an increase in the number of employees due to the opening of new branches in Eastern European countries. Finally, non-recurring costs of Euro 0.8 million were recorded in 2011, slightly more than in These costs mainly regarded personnel restructuring in Italy and the Czech Republic. Distribution costs for 2011 amounted to Euro 31.5 million and increased by Euro 4.6 million compared to prior year (+16.9%). Assuming a like-for-like scope of consolidation in prior year, distribution costs decreased by Euro 0.9 million. Distribution costs include rental and operating lease costs, advertising/promotional expenses and travel and subsistence costs. These costs decreased from 5.4% of gross sales in 2010 to 4.9% in 2011, mainly because the Group incurred a lower level of non-recurring costs. Administrative costs amounted to Euro 17.9 million in 2011, a Euro 3.8 million increase compared to prior year (+26.5%). Assuming a like-for-like scope of consolidation in prior year, administrative costs increased by Euro 1.5 million. Administrative costs mainly include costs for services, legal and professional advisory costs. Total administrative costs decreased from 2.83% of gross sales in 2010 to 2.76% in In 2011, administrative costs also included non-recurring costs totaling Euro 3.1 million and including the cost of legal services, audit and certification costs, banking and consulting services incurred by the Company in relation to the planned IPO. Other operating costs for 2011 amounted to Euro 4.4 million with an increase of Euro 1.4 million compared to prior year (+48.3%). Assuming a like-for-like scope of consolidation in prior year, other operating costs increased by Euro 0.7 million. The increase was mainly due to the higher cost of operating the Group s branches and operating units, following the opening of new branches in Eastern Europe. In 2011, net financial expenses totaled Euro 18.5 million, an improvement compared to Euro 20.9 million in This improvement is explained by the analysis of the main component items set out below. 7

8 Bank loan interest expenses decreased by around Euro 4.6 million mainly because borrowing was reduced by scheduled repayments and thanks to the favorable 1 month and 6 month Euribor trend which led to lower financial expenses for the Group after Interest Rate Swap agreements were terminated in August Net exchange losses of Euro 2.4 million were reported for the year ended 31 December 2011 compared to net exchange gains of Euro 1.7 million in The Group s exchange gains and losses are mainly caused by the impact of exchange rate fluctuation on purchase and sale transactions and by the translation into Euro of financial statements prepared in local currency by some subsidiaries. The Group recognized non-monetary net income of Euro 1.1 million following the closure of derivative financial instruments in place at 31 December Finally, non-recurring income was recorded during the year following collection of Euro 2.0 million in the form of a refund of interest expenses paid in prior years on the loan arranged with Dresdner Bank Luxembourg in 1999 and extinguished in Taxes on income for the year amounted to Euro 13.6 million, Euro 1.3 million more than in The increase essentially regarded current taxation for the year as a result of higher taxable income. As a result of the above, the net profit for 2011 amounted to Euro 32.5 million, an improvement on Euro 19.9 million in Finally, EBITDA Adjusted i.e. operating profit before depreciation and amortization, impairment adjustments to goodwill and other assets and non-recurring operating income/expenses totaled Euro 79.4 million in 2011 compared to Euro 59.1 million in 2010 (Euro 71.8 million assuming a like-for-like scope of consolidation). Balance Sheet situation The following table shows the reclassified Group balance sheet: 8

9 Amounts in thousands of Euro Trade Working Capital* Other current assets / (liabilities) excluding financial liabilities (37.766) (40.873) Net working capital ** Other current assets /(liabilities) (current portion of prov for risks and advances on acquisitions) (8.193) (8.261) Total current assets and liabilities Non-current assets (excluding financial assets) Non-current liabilities (excluding financial liabilities) (14.291) (17.938) Total non-current assets and liabilities (excluding financial items) Net invested capital Shareholders' equity Net financial indebtedness*** Total sources of funding * Trade Working Capital is defined as the sum of inventories and trade receivables due within a year less trade payables due within a year. Trade Working Capital is not an indicator recognized or defined by IAS/IFRS as adopted by the European Union. ** Net working capital is defined as current assets less current liabilities, excluding cash and cash equivalents, bank overdrafts, current portion of provisions for risks and charges, payments on account on acquisitions and other financial payables due within a year plus financial assets and liabilities included in other current assets and liabilities. Net Working Capital is not an indicator recognized or defined by IAS/IFRS as adopted by the European Union. ***Net financial indebtedness is defined as the sum of cash and cash equivalents and other current financial assets less bank overdrafts and other financial liabilities due within a year and other non-current financial liabilities. The net financial position is not an indicator recognized or defined by IAS/IFRS as adopted by the European Union. The net financial position is defined as required by the CONSOB Communication of 28 July Net financial indebtedness stood at Euro million at 31 December 2011 compared to Euro million at 31 December 2010, as shown in more detail in the following table: 9

10 Amounts in thousands of Euro (A) Cash and cash equivalents (B) Other liquid assets - - (C) Liquidity (A) + (B) (D) Derivative financial instruments - - (E) Total current financial assets (C) + (D) (F) Bank borrowing - overdrafts (G) Bank borrowing - loans (H) Finance lease payables (I) Derivative financial instruments (J) Other financial liabilities (L) Financial indebtedness - current (F) + (G) + (H) + (I) + (J) (M) Net current financial indebtedness (L) - (E) (N) Bank borrowing - loans (O) Derivative financial instruments - - (P) Finance lease payables (Q) Other financial liabilities (R) Financial indebtedness - non-current (N) + (O) + (P) + (Q) (S) Net financial indebtedness (M) + (R) In 2011, the Group generated operating cash flows of Euro 45.7 million that were largely deployed to sustain investment activities (cash flows from investment activities were negative by Euro 12.4 million) and financing activities (cash flows from financing activities were negative by Euro 14.6 million). The following table contains a summary of cash flows from operating activities: Amounts in thousands of Euro Profit before taxation and financial items Amortization/depreciation and (gains)/losses on sale of fixed assets Change in NWC items: Interest received / (paid) Income taxes Cash flows generated /(absorbed) by operating activities (925) (15.017) (20.156) (15.176) (11.727) Cash flows from operating activities totaled Euro 45.7 million in 2011, some Euro 25.6 million more than in 2010 (Euro 20.1 million). 10

11 A more detailed analysis of the items that make up cash flows from operating activities reveals that while EBIT has improved significantly compared to prior year, the Group has sustained higher cash outflows for income taxes paid; it also recorded positive cash flow due to the change in Net Working Capital and, above all, an improvement on prior year in relation to net cash outflows for interest (also thanks to collection of non-recurring income from Dresdner Bank in the form of a refund of interest expenses paid in previous years). After its investing and financing activities, the Group generated cash flows of Euro 17.1 million in 2011, as shown in the following table: Amounts in thousands of Euro Cash flows generated /(absorbed) by operating activities Acquisitions and contributions (2.500) (51.253) Net investment in property, plant & equipment and intangible assets (9.926) (8.026) Cash flows generated / (absorbed) by investing activities (12.426) (59.279) Share capital increases Arrangement /(repayment) of current and non-current loans (12.054) (2.488) Dividends paid (2.547) (3.022) Cash flows generated/(absorbed) by financing activities (14.601) Foreign exchange effects (1.565) 133 Cash flows generated/(absorbed) by discontinued operating activities 0 (108) Cash flows generated/(absorbed) during the year

12 Capital expenditure In 2011, the Group incurred capital expenditure of Euro 10.6 million on tangible and intangible assets, as shown in detail in the following table: Property, plant & equipment Intangible assets Total Italy Switzerland Eastern Europe Total The Group conducts its business from premises owned by third parties, except for three properties: two properties in Budapest owned by Lang Kft and Cargo Kft, respectively, and a property in Baar owned by Rhiag Group Ltd. For the Italian companies, capex on property, plant and equipment mainly regards purchases of shelving and renovation and refurbishments to comply with legal requirements at the central warehouses and other branch premises. The capex incurred in 2011 was made in order to maintain the efficiency of the existing logistics network and to complete the process of integration between the branches of Rhiag Inter Auto Parts Italia S.p.A. and Bertolotti S.p.A. which began in For the companies operating on Eastern European markets, capex on tangible assets mainly regarded purchases of shelving and machinery to move products around the warehouse as well as purchases of cars, vans and other vehicles, mainly by companies operating in the Czech Republic and Romania, especially following the opening of new branches. In Italy, capex on intangible assets regarded the purchase of software to book goods in and out of inventory, for management and financial reporting, for technical databases of spare parts for cars and industrial vehicles, for the network of A posto auto repair shops and for the company s online catalogue. In Eastern Europe, capex on intangible assets mainly regarded inventory management software and reporting systems, primarily in the Czech Republic, Romania and Hungary. Operating performance and business outlook The Group s business remains focused on the sale and distribution of spare parts for automobiles and commercial vehicles in Italy, Switzerland and Eastern Europe. 12

13 The constant introduction of new models of automobiles, together with technological advances regarding the design and production of components, makes it increasingly complex for aftermarket businesses to manage spare parts because of the growing need to manage an ever vaster range of products with low rates of turnover. These complexities can constitute an opportunity if considered together with the continual improvement of the Group s strengths in comparison to many of its competitors i.e. the extensive and effective nature of its logistics and distribution network, its wide range of products and services and the size of its network of affiliated auto repair shops. The Group aims to increase its market share by concentrating on the skills and strengths developed over the years. Many rival companies, especially the smaller ones, have not managed to develop in the same way. In particular, especially in those countries where the Group is already market leader, growth is possible mainly at the expense of smaller competitors that cannot count on the infrastructures, know-how and critical mass needed to deal effectively and promptly with the increasing complexities of the independent aftermarket. No improvement in the Italian and international macroeconomic environment is expected for the coming year. The domestic Italian market is feeling the effects of the measures taken by the government to combat the economic and financial crisis in the second half of 2011; these measures have reduced the spending power of all consumers, including motorists. In the first few months of 2012, the market slowed down sharply mainly because of an increase in the cost of fuel, a reduction in automobile use and less readiness to spend because of uncertainty about the future. Other factors included the effects of a transport sector strike, less scope for customers to turn to the banking sector for credit and the general recession that has affected the Italian market. This situation was reflected in the fall in sales compared to prior year and, immediately, it led the Company to look into ways of safeguarding its operating and financial results, as far as possible, through measures to reduce costs (direct selling costs, variable personnel costs and variable/fixed operating costs) and by entering into new negotiations with leading vendors in order to obtain possible reductions in the purchase price of materials. In Eastern Europe, the situation is not bright but it is less critical than in Italy. On the Swiss market, strong new automobile registrations in 2010 and 2011 and the strengthening of the Swiss Franc against the Euro ensure that domestic consumption of spare parts remains weak. In this context, the Group will continue to expand its range of products and services, as well as its network of authorized auto repair shops and its logistics and distribution network, while 13

14 seeking to make its internal processes even more efficient and effective in order to keep costs down. In the first few months of 2012, the Group began to distribute its new tires product line and has continued to expand and complete its range of products. Also, some Group companies have begun to distribute locally products bearing the Starline brand owned by subsidiary Auto Kelly AS. The Group is also interested in evaluating the possibility of developing its business by entering into new markets. Indeed, Rhiag Inter Auto Parts Italia S.p.A. is looking, together with a consulting firm, into the possibility of entering the Chinese market as it feels such a project offers an interesting long-term strategic opportunity on a market with great potential for future growth and development. Finally, in 2012, in light of the problems encountered by some customers, the Group is considering the possibility of taking over from them in some parts of the country. 14

15 Analysis of income statement performance and balance sheet and financial position of holding company Rhiag - Inter Auto Parts Italia S.p.A. Income Statement performance The reclassified income statement of the Company for 2011 summarizes its performance for the year: Amounts in thousands of Euro Esercizio 2011 Esercizio 2010 Gross sales Direct selling costs (14.366) (14.869) Net sales ,58% 94,13% Cost of goods sold ( ) ( ) Gross profit ,25% 22,59% Distribution costs (11.392) (13.879) Administrative costs (8.250) (4.971) Other operating costs (1.084) (1.108) Amortization/depreciation of intangible assets and P,P&E (2.830) (2.844) Operating profit ,37% 13,58% Financial income / (expenses) (12.661) (18.528) Profit before taxation ,60% 6,27% Taxes on income (7.404) (8.672) Net profit from continuing operations ,81% 2,84% EBITDA Adjusted * ,98% 16,44% * EBITDA Adjusted includes gross sales less direct selling costs, cost of goods sold, distribution costs, administrative costs, other operating costs except for non-recurring costs and restructuring costs. EBITDA Adjusted is not specifically defined as a performance indicator by the IAS/IFRS adopted by the European Union. In 2011, Rhiag Inter Auto Parts Italia S.p.A. (hereafter also the Company ) recorded gross sales of Euro million, a 4.7% increase compared to prior year. On a market 15

16 characterized by weak growth, the Company maintained its position as leader on the Italian independent aftermarket. In 2011 Rhiag - Inter Auto Parts Italia S.p.A. continued to develop its product portfolio and range of services while improving its distribution network. The Company is also increasingly expanding its collaboration with the network of authorized auto repair shops which is an important means of building up customer loyalty and developing the market for independent auto repair shops in Italy. Finally, the Company s contracts with car rental companies, leasing and long-term rental companies operating in Italy continue. Under these contracts, repairs and maintenance of the vehicles in said companies fleets are carried out by participating authorized auto repair shops. In turn, the authorized auto repair shops mainly purchase spare parts from dealers that are customers of the Group. Cost of goods sold, amounting to Euro million, increased by Euro 10.7 million compared to prior year. It also increased from 71.5% of gross sales in 2010 to 72.3% in 2011, mainly because of increases in personnel costs and transport costs. Total operating costs (excluding depreciation and amortization) increased by Euro 0.7 million from Euro 20.0 million to Euro 20.7 million. This increase was mainly due to costs totaling Euro 3.1 million incurred by the Company in relation to the planned IPO and including the cost of legal services, audit and certification costs, banking and consulting services. Net financial expenses totaled Euro 12.7 million in 2011, a clear improvement on net financial expenses of Euro 18.5 million in The individual component items must be analyzed in order to understand the reasons for this decrease: - Bank loan interest expenses decreased by around Euro 6.2 million mainly because of a reduction in borrowing after repayments were made as scheduled, the allocation of Euro 40 million of the Multicurrency Term and revolving facilities agreement to Auto Kelly SA in relation to its acquisition by the Rhiag Group and the favorable 1 month and 6 month Euribor trend which led to lower financial expenses for the Company after Interest Rate Swap agreements entered into in 2007 were terminated with effect from August

17 - During the year, the Company received a refund of Euro 2.0 million of interest expenses paid in the form of deductions at source in relation to a loan arranged with Dresdner Bank Luxembourg SA in 1999 and extinguished in Taxes on income for the year amounted to Euro 7.4 million, Euro 1.3 million less than in prior year. The decrease was mainly thanks to greater deductibility of financial expenses and the effect of taking part in a Consolidated Taxation Arrangement. As a result of the above, the net profit for 2011 amounted to Euro 15.4 million, an increase compared to Euro 8.2 million in Finally, EBITDA Adjusted i.e. operating profit before depreciation and amortization, impairment adjustments to goodwill and other assets and non-recurring operating income/expenses totaled Euro 42.4 million in 2011, up by Euro 0.8 million (+1.8%) compared to Euro 41.6 million in

18 Balance Sheet situation The following table shows the Company s reclassified balance sheet: Amounts in thousands of Euro Trade Working Capital* Other current assets / (liabilities) excluding financial liabilities (29.820) (31.630) Net working capital ** Other current assets /(liabilities) (current portion of prov for risks and advances on acquisitions) (923) (1.374) Total current assets and liabilities Non-current assets (excluding financial assets) Non-current liabilities (excluding financial liabilities) (8.790) (9.796) Total non-current assets and liabilities (excluding financial items) Net invested capital Shareholders' equity Net financial indebtedness*** Total sources of funding * Trade Working Capital is defined as the sum of inventories and trade receivables due within a year less trade payables due within a year. Trade Working Capital is not an indicator recognized or defined by IAS/IFRS as adopted by the European Union. ** Net working capital is defined as current assets less current liabilities, excluding cash and cash equivalents, bank overdrafts, current portion of provisions for risks and charges, payments on account on acquisitions and other financial payables due within a year plus financial assets and liabilities included in other current assets and liabilities. Net Working Capital is not an indicator recognized or defined by IAS/IFRS as adopted by the European Union. *** Net financial indebtedness is defined as the sum of cash and cash equivalents and other current financial assets less bank overdrafts and other financial liabilities due within a year and other non-current financial liabilities. The net financial position is not an indicator recognized or defined by IAS/IFRS as adopted by the European Union. The net financial position is defined as required by the CONSOB Communication of 28 July

19 Net financial indebtedness stood at Euro million at 31 December 2011, a decrease of Euro 11.9 million compared to 31 December 2010, as shown in more detail in the following table: Amounts in thousands of Euro (A) Cash and cash equivalents (B) Other liquid assets - - (C) Liquidity (A) + (B) (D) Derivative financial instruments (E) Total current financial assets (C) + (D) (F) Bank borrowing - overdrafts (G) Bank borrowing - loans (H) Finance lease payables - - (I) Derivative financial instruments (J) Debts towards affiliated companies (K) Other financial liabilities (L) Financial indebtedness - current (F) + (G) + (H) + (I) + (J) + (K) (M) Net current financial indebtedness (L) - (E) (N) Bank borrowing - loans (O) Derivative financial instruments - - (P) Finance lease payables - - (Q) Other financial liabilities - - (R) Financial indebtedness - non-current (N) + (O) + (P) + (Q) (S) Net financial indebtedness (M) + (R) This significant improvement was thanks to the cash flows generated by the Company during the year, especially from operating activities as shown in the following table: Amounts in thousands of Euro Profit before taxation and financial items Amortization/depreciation and (gains)/losses on sale of fixed assets Change in NWC items: Interest received / (paid) Income taxes Cash flows generated /(absorbed) by operating activities (3.148) (10.748) (17.287) (8.470) (8.709)

20 The Company generated operating cash flows of Euro 17.9 million with Euro 2.2 million of this used to finance investment activities and Euro 9.4 million to cover financing activities. During the year, financing activities included the distribution of dividends of Euro 1.9 million to parent company Lanchester S.A., the repayment of the current portion of Euro 6.2 million the loan from ING Bank and the repayment of the remaining portion of subsidiary company loans, as shown in detail in the table below: Amounts in thousands of Euro Cash flows generated /(absorbed) by operating activities Acquisitions and contributions Net investment in property, plant & equipment and intangible assets Cash flows generated / (absorbed) by investing activities Share capital increases Cash flows generated/(absorbed) during the year (20.005) (2.168) (1.883) (2.168) (21.888) (0) (7.489) (46.207) Arrangement /(repayment) of current and non-current loans Dividends paid (1.906) Cash flows generated/(absorbed) by financing activities (9.395) (87) Foreign exchange effects Cash flows generated/(absorbed) by discontinued operating activities (3.168) 20

21 Reconciliation between net profit and shareholders equity of the Parent Company and consolidated net profit and shareholders equity The following table contains a reconciliation between the net profit for 2011 and shareholders equity as at 31 December 2011 of parent company Rhiag Inter Auto Parts Italia S.p.A. and the corresponding consolidated amounts.: Shareholders' equity at 31/12/2011 Net profit 2011 Separate financial statements of Rhiag Inter Auto Parts Italia S.p.A Contribution from consolidated investments Elimination of intercompany profits and losses in inventory (787) (256) Elimination of dividends distributed between subsidiaries (7.769) Other adjustments (338) Consolidated financial statements of Rhiag Group Research and development In terms of Article 2428 (2)(1) of the Italian Civil Code, we note that the Group did not incur any costs for research and development activities. Relations with parent companies, associated companies and other related parties The Ordinary General Meeting of Rhiag Inter Auto Parts Italia S.p.A. resolved on 14 July 2011 and 22 December 2011 to distribute dividends of Euro 522 thousand and Euro 1,384 thousand, respectively, to parent company Lanchester S.A., using the share premium reserve. The Group has had no other trade or financial relations with parent company Lanchester S.A. other than as described above. Finally, we note that there were no transactions with associated companies in For more details about the financial and trade relations maintained with other Rhiag Group companies, reference should be made to the Notes to the Consolidated Financial Statements. Parent company shares In compliance with the requirements of Article 2428(2)(4) of the Italian Civil Code, we inform you that, at 31 December 2011 and during the year, the Group did not hold, purchase or dispose of any treasury shares or shares in parent companies. Main risks and uncertainties to which the Group is exposed Information pursuant to Article 2428(2)(6-bis) of the Italian Civil Code 21

22 In the course of its activities, the Group is exposed to external risks and uncertainties, relating to factors outside its control and regarding the general macroeconomic environment. It is also exposed to specific risks regarding the operating sectors in which it conducts its activities and to risks regarding strategic decisions and internal operational decisions. The specific risks that could give rise to obligations for each of the Group companies are assessed when determining the need for any provision and are disclosed in the notes to the financial statements, together with significant contingent liabilities. Financial risks are commentated upon later in this report. We have analyzed below the risks and uncertainties essentially relating to the economic and regulatory environment and operational risks that could affect the performance of the Group. Legislative and regulatory uncertainty In addition to the above, it must be recalled that the income statement, balance sheet and financial situation of the Group companies is influenced by various factors regarding the macroeconomic environment including the increase or decrease in gross domestic product, the level of consumer and business confidence, interest rate trends, the cost of raw materials and the rate of unemployment in the countries where they operates and where their products are distributed. At present, we do not foresee any significant changes to the European macroeconomic environment or any major regulatory and legislative changes regarding the sector in which the Group operates. Risks regarding relations with employees Employees of the Group companies are protected by law and by national collective labor agreements. The laws and/or collective labor agreements applicable to the individual companies may affect their flexibility in strategically redefining and/or repositioning their activities. The Companies ability to make staff cuts or other measures to terminate employment relations, also on a temporary basis, is subject to government authorization and the agreement of the local trades unions. Any industrial action by the employees could have a negative effect on the business of the Group companies. Legal and contractual risks 22

23 Legal risks regard disputes that the Group might have with various parties such as suppliers, customers and personnel. As regards the specific risks and uncertainties of the Group s activities, we note that, at the reporting date, there were no significant pending legal disputes other than as brought to your attention last year. On 1 December 2010, Rhiag - Inter Auto Parts Italia S.p.A. received a Report of Findings made during a tax inspection, for VAT and direct tax purposes, relating to the 2007 fiscal year and extended to the 2008 fiscal year, solely with regard to interest expenses arising on the Multicurrency Term and revolving facilities agreement utilized to acquire and refinance the Rhiag Group. The main finding regards the alleged failure to acknowledge and account for income resulting from the services that Sidelia 3 S.p.A. later merged through incorporation into Rhiag S.p.A. rendered, in the view of the tax inspectors, in relation to the raising of finance carried out solely in the interests of foreign shareholder Lanchester S.A.. According to the tax inspectors, the fair value of the services that Sidelia 3 provided and that should have been accounted for was equal to part of the interest and related expenses incurred and resulting from the Multicurrency Term and revolving facilities agreement. The Report of Findings concludes that some Euro 0.4 million should be disallowed for IRES (National Corporation Tax) purposes only for fiscal tax year 2007 with Euro 3.2 million disallowed for fiscal year 2008; this leads to additional taxation of Euro 0.1 million for 2007 and Euro 0.9 million for These amounts do not take account of administrative penalties that could range from a minimum of 100% to a maximum of 200% of the additional taxes assessed nor do they consider interest expenses for late payment that will be applied by the Italian Tax Authorities if a tax demand is issued. At the date of preparation of these financial statements, the Company had not yet received any tax demand. Also with the support of an opinion received from its tax advisors, on 28 January 2011, Rhiag - Inter Auto Parts Italia S.p.A. duly submitted its arguments in terms of Article 12 of Law 212/2000 to the Lombardy Regional Head Office of the Italian Tax Authorities in order to dispute the aforementioned finding. The opinion of the Group tax advisors which concludes that the issues contained in the Report of Findings are unfounded and, therefore, should be annulled in any future litigation. Bearing this in mind, no provision for risks has been made as the risk that the dispute will have a negative outcome has been classed between remote and possible. At the date of approval of these financial statements, no information altering the conclusions reached last year has emerged. 23

24 If any other positions of risk are identified in future, the need for any provisions will be assessed after estimating the probability that the contractual and legal risks will materialize. Utilization of these provisions will depend on when the risk materializes and the amount that was estimated. Financial risks Interest rate risk Exposure to the interest rate risk arises from the need to finance operating activities both industrial and financial and the need to employ available liquidity. Fluctuation in market rates of interest may have a positive or negative impact on the Group s results, indirectly affecting the costs and returns relating to financing and investing operations. The Group measures its exposure to the risk of interest rate fluctuation on a quarterly basis and manages these risks using derivative financial interests based on the directives contained in the Interest rate risk management policy adopted by the Group. As at 31 December 2010, the Group was party to several derivative financial instruments (plain vanilla Interest Rate Swaps) intended to hedge the interest rate risk relating to the Multicurrency Term and Revolving Facilities Agreement entered into in 2007; these derivatives expired in August Given the favorable 1 month and 6 month Euribor trends, the Company has decided not to arrange any new hedging instruments to hedge the interest rate risk as it believes this will be beneficial in terms of cash outflows in the months following expiry of these derivative instruments. Even though the Group is not currently party to any hedging transactions, we cannot exclude the possibility that sudden interest rate fluctuation could have a negative impact on its income statement results and cash flows. Market risk In addition to those risks regarding the general economic crisis, the main market risks in Italy regard increased competition from automobile manufacturers which are increasingly seeking to increase their share of the aftermarket. In Eastern Europe, the main market risks regard competition from the automobile manufacturers, from the numerous other independent operators present on the various markets and from exporters in neighboring countries that are exercising significant pressure on selling prices and product margins. The Group will face up to these risks by improving customer service while increasing its distribution capacity on the markets where it operates. On the procurement side, the main risks could regard the inability 24

25 of suppliers to guarantee a satisfactory and stable level of service because of fluctuating levels of production caused by demand for original equipment products. This situation could lead to the risk of a deterioration in customer service levels for the Group companies. The Group companies continue to monitor the operations of their suppliers while, at the same time, seeking alternative new procurement sources. Finally, we note that the Group s operating and financial activities take place on various European markets, also outside the European Union (Ukraine) and they could be affected by the political and social environment in those countries, by possible import and export restrictions and by the different tax regimes applying locally. Any unfavorable changes in these areas could adversely affect the business in certain countries and the Group s ability to generate profit and cash flows. Credit risk The credit risk represents the risk of suffering a loss due to failure by third parties to fulfill payment obligations. The Group companies have adopted credit management procedures designed considering the characteristics of the market and the local customer base in order to reduce the risk of exposure and to manage receivables in a timely and proactive manner. Preventive monitoring of the credit risk with regard to trade receivables involves grouping them based on customer type, the age of the receivable, the existence of any previous financial difficulties or disputes and the possible existence of any ongoing legal or insolvency proceedings. Financial assets are reported net of writedowns calculated based on the risk of default by the counterparty, as determined considering available information on the solvency of the customer and taking account of historical information. Liquidity risk The liquidity risk, or financial risk, is the risk that the Group may have difficulty raising, at a reasonable cost and at the right time, the funds needed to carry out its operating activities and fulfill the commitments resulting therefrom. Moreover, the Group is subject to the liquidity risk that could arise if it fails to respect the covenants included in its Loan Agreement as, in that case, the lending institution would be entitled to request the early repayment of the loans made available. 25

26 The cash flows, funding requirements and liquidity of the Group companies are monitored and managed centrally under the control of the Finance Department with the aim of ensuring that financial resources are managed effectively and efficiently. Management believes that the funding and the lines of credit currently available (including an unutilized committed revolving line of credit of Euro 20 million), plus the liquidity that will be generated by operating and financing activities, will enable the Group to satisfy the requirements resulting from its investment activities, working capital management and the settlement of debt and payables as they fall due. Exchange rate risk The Group s functional and reporting currency is the Euro. However, as it operates on an international level and also distributes its products in countries that use currencies other than the Euro, the Rhiag Group is exposed to the exchange rate risk in relation to the translation into Euro of the local currency financial statements of foreign subsidiaries for inclusion in the consolidated financial statements on the basis of IAS. Specifically, the Group has exchange rate risk exposures in relation to the Czech Koruna, the Swiss Franc, the Hungarian Forint, the Romanian Leu and the Ukrainian Hryvna. Moreover, the Group companies operating in the Czech Republic, Hungary, Ukraine, Romania and Switzerland generate revenue in local currency while purchasing goods for resale mainly in Euro, thus exposing them to the risk of the weakening of their local currencies against the Euro. The Group has opted not to enter into any exchange risk hedging transactions because, as per standard practice on the aftermarket, the Group s product pricing policy also takes account of exchange rate fluctuation, thus enabling it, quite frequently, to pass on any unfavorable exchange rate fluctuations directly by increasing the selling prices of its products, while considering competition issues. Nonetheless, we cannot exclude the possibility that sudden exchange rate fluctuation could have a negative impact on the income statement, balance sheet and financial situation of the Company and/or the Group. OTHER INFORMATION Compliance with rules on personal data protection in terms of Legislative Decree 196/