Sensitivity Factors

• Foreign exchange risk >


The Group operates internationally and is exposed to foreign exchange risk. This risk is managed by the Sector Treasury Units and coordinated by Group Treasury.

The Operating Units are responsible for gathering all the information inherent to the positions subject to foreign exchange risk which are managed by forward contracts negotiated with the Sector Treasury Units. The positions subject to exchange risk are mainly represented by sales and purchases invoices.

The Sector Treasury Units are responsible for evaluating and managing the net position for every currency, consistent with policies and restrictions, by negotiating derivative contracts on the market, generally forward contracts.

As a result, a change in exchange rates will not generate any significant effects on the income statement. Forward contracts between the Operating Units and the Sector Treasury Units as well as those among the Sector Treasury Units and the market are not designated as hedging instruments as defined by IAS 39 although they are in place for the purpose of managing risks.



• Currency translation risk >

The Group holds controlling investments in companies which prepare their financial statements in currencies other than the euro, which is the reference currency of the Group. This exposes the Group to risk from currency translations since fluctuations in the exchange rates of certain foreign currencies against the consolidation currency (euro) can cause changes in the amount of consolidated equity.

The principal exposures to currency translation risk are monitored but it is not the Group’s policy to hedge this exposure.

About 73 percent (about 80 percent at December 31, 2006) of total consolidated equity at December 31, 2007 is expressed in euro. The most important currencies for the Group other than the euro are the Brazilian Real at 11 percent (7 percent at December 31, 2006) and the Turkish Lira at 6 percent (5 percent at December 31, 2006).



• Interest rate risk >

The Group's policy is to tend to maintain a correct balance between fixed-rate debt and floating-rate debt with the aim being to have fixed-rate debt at about 70 percent of total financial debt.

The Group manages the risk of an increase in floating-rate debt interest rates by compensation with floating-rate receivables and by the use of derivative contracts.

The designation of such derivatives as hedging instruments under IAS 39 is decided case by case and authorized by the General Finance and Strategic Planning Department and the General Operations department.



• Price risk associated with financial assets >

The Group is exposed to price risk to the extent of the volatility of financial assets such as listed and unlisted equity shares and bonds, listed real estate investment funds and unlisted closed-end real estate investment funds for an amount equal to about 12 percent of total consolidated assets at December 31, 2007; the change in fair value of these financial assets is recognized in equity or in the income statement in accordance with IAS 39.

Listed equity shares and listed real estate investment funds, which change in fair value is recognized in equity, represent 77 percent of total financial assets subject to price risk. A change of 1 percent in these listed securities, all other conditions being equal, would cause a change of Euros 8,233 thousand (Euros 8,985 thousand at December 31, 2006) in the equity of the Group.

Financial assets, which change in fair value is recognized through profit and loss, refer to unlisted closed-end real estate investment funds and fair value is arrived by reference to a basket of similarly listed securities. A change in the reference index relating to listed closed-end real estate funds of 1 percent, all other conditions being equal, would cause an impact on the result for the year of Euros 319 thousand (at December 31, 2006 there were no financial assets at fair value through profit or loss).

• Credit risk >

Credit risk represents the Group’s exposure to potential losses due to the non-fulfillment of obligations undertaken by commercial and financial counterparts.

In order to limit this risk with commercial counterparts, the Group has put into place procedures to assess the potential and financial creditworthiness of the customer in order to monitor flows of estimated proceeds and for recovery actions.

The aim of these procedures is to define the customer credit limits which, if exceeded, will activate the rule causing supplies to be blocked.

In some cases the client is asked to furnish guarantees; these will mainly be bank guarantees provided by high-credit standing banks or personal guarantees. Mortgages are requested less frequently.

Another tool used to manage commercial credit risk are insurance policies taken out to forestall the risk of non-payment through a meticulous selection of the customer portfolio made together with the insurance company, which undertakes to guarantee compensation in the case of insolvency.

As for financial counterparts, for the management of temporary excess resources or for the negotiation of derivatives, the Group only uses high-credit worthy counterparts.

Receivables for shareholder loans are evaluated together with the stakes invested in the associate or joint venture. The carrying amount of junior notes and non-performing loans is adjusted each time there is a change in the estimate of discounted cash flows expected and, in the case of impairment, is directly reduced without recognition in any provision account, except for limited positions where specific provision accounts have been set up. In some cases the customers are asked to furnish guarantees; these are mainly bank guarantees provided by high-credit standing banks, personal guarantees or mortgages.

Impairment losses on receivables are calculated on the basis of the risk of non-fulfillment by the counterpart determined by considering the information available on solvency of the counterpart and historical experience. The carrying amount of receivables is indirectly reduced through recognition in a provision account.

Single significant positions, for which there is an objective condition of partial or total uncollectibility are written down individually. The amount of the impairment loss takes into account the estimate of future recoverable flows and the relative date of collection, recovery costs and expenses and any fair value of the guarantees.

The positions which are not written down individually are included in groups with similar characteristics from the standpoint of credit risk and written down on a collective basis according to a percentage that increases as the overdue period increases. The collective impairment procedure also applies to receivables not yet due.

The impairment percentages are determined on the basis of historical experience and statistical data. The Group does not have significant concentrations of credit risk.



• Liquidity risk >

Liquidity risk represents the risk that available financial resources will not be sufficient to meet financial and commercial obligations within the prescribed time and due dates. The main instruments used by the Group to manage liquidity risk are three-year and annual financial plans and treasury plans that enable the Group to fully and correctly recognize and measure incoming and outgoing monetary flows. Variances between the plans and the actual figures are constantly analyzed.

Prudent liquidity risk management implies maintaining sufficient cash and/or short-term securities that can be readily converted into cash, the availability of funding through an adequate amount of committed credit facilities and/or the ability to close out market positions. Due to the dynamic nature of the businesses in which it operates, the Group aims to maintain flexibility in funding by keeping committed credit lines available.

In order to optimize the management of financial resources and thus the liquidity risk, the Group has implemented a centralized system for managing collection and payment flows while respecting the different local currency and tax laws. The negotiation and management of bank transactions is conducted centrally so that short-term and medium-term financial requirements are assured of coverage at the lowest cost possible. Even the funding of medium/long-term resources on the capital market is optimized by using centralized management.

At December 31, 2007, in addition to liquidity of Euros 2,057,682 thousand, the Group also has unused committed credit lines of Euros 2,672,000 thousand (Euros 1,791,000 thousand at December 31, 2006).