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2011 Annual report - touax group

2011 Annual report - touax group

Annual

Annual report 2011 4.3.2. Counterparty risk Counterparty risk from cash and cash equivalents, as well as from derivative instruments under contract with banks and/or financial institutions, is managed centrally by the Group's Treasury and Financing Department. This risk is discussed in the notes to the consolidated financial statements, note 26 page 91. 4.3.3. Risk of dependence ➜ Patents, licenses The Group is not significantly dependent on any patent or license holders, procurement, industrial, business or financial agreements, new manufacturing processes and suppliers, or local authorities. ➜ Customers, suppliers Leasing is a recurring, stable business. As such, leasing revenues are not very volatile. The business sectors are distinct, and the customers and suppliers for each sector are different. The businesses use low-tech equipment which can easily be built and leased. In each of its businesses, the Group has a diversified portfolio of customers and suppliers, and is not dependent on any one leasing customer or supplier. Third-party asset management is also a recurring business. However, the signing of new management programs, and therefore the sale of equipment and disposal of assets, may fluctuate considerably from one quarter to another or from one year to the next. The Group sells equipment to a limited number of investors: 38% of the revenues from equipment sales in 2011 came from a single investor. To minimize the risk of investor dependence, the Group diversifies the number of investors it works with. The primary customer accounts for an estimated 13% of revenues, the top five accounts for 28% of revenues, and the top ten represent 34% of revenues. The primary customer is the equipment investor mentioned previously. 4.4. Operational risks 4.4.1. Supplier risk The Group buys part of the equipments it leases. Therefore, the Group can find itself in the situation of having a product whose characteristics are not in line with the optimization needs of the market or not being able to buy new equipment quickly enough when the factories no longer have the capacity to accept new orders. Note that the economic uncertainty has restricted production capacity. This capacity risk is partly limited over time, and it only has an impact on the Group’s growth, not on the equipment already leased. Moreover, the Group pays close attention to the quality of the equipment purchased. ➜ Modular Buildings In its role as manufacturer, the Group's production of modular buildings may slow down if a supplier of intermediate products or spare parts runs into financial or technical trouble. To overcome any possible breach of contract, the Group is developing a network of primary and supporting suppliers. This risk is limited to the new equipment produced by the Group. ➜ River Barges The fuel market can affect the competitive advantage of the river transport industry, either due to lack of fuel or to higher prices. Since the Group has repositioned its businesses on leasing, this risk is now limited. 4.4.2. Raw material prices risk Equipment purchase prices vary according to the volatility of commodity prices, especially steel. Such volatility is not only attributed to the economic mechanism of supply and demand, but also to sensitivity concerning exchange rate fluctuations when commodity prices are listed in dollars (see exchange rate risk, note 26 page 91). The rise in commodity prices has a knock-on effect on the final prices of equipment, while inflation also has a positive impact on equipment sale prices and residual values. Lease prices are mainly correlated with equipment prices. In an environment marked by falling prices, the Group may see an occasional drop in profitability. This risk is limited due to the length of the Group’s contracts and its long-life equipment. To date, the Group has not observed any major drop in prices due to the significant reduction in production capacity. Volatile commodity prices can also affect the prices of ordered equipment for firm purchase agreements spread over time. This Group is reducing this risk by restricting its firm commitments and by negotiating indexing mechanisms for commodity prices, especially steel. 4.4.3. Risk of shipping container location and loss Containers are sometimes returned by lessees in areas where demand for containers is low (such as the US). In order to protect itself from this risk, the Group contractually controls return locations and applies “penalties” (drop off charge) when it recovers containers in locations with a low demand. The Group has also set up a used container sales department in order to reduce inventory in locations with a low demand. Container inventory levels at warehouses are monitored every day and analyzed every month. Furthermore, containers can also be lost or damaged. In such cases, the Group invoices its customers for the replacement values previously accepted in each lease agreement, where the amount is always greater than the asset’s net book value. Loss or damage due to natural disasters is either covered by the customer’s insurance policy or by the policies of the depots. 24

4.4.4. Technological and quality risk linked to modular buildings Modular buildings may be affected by technical obsolescence following quality improvements in rival equipment or (aesthetic) upgrades requested by customers. Research into quality materials generates extra costs. The Group invests in high-quality equipment over and above existing standards and rival products, enabling the Group to minimize the extra costs inherent in new materials. 4.4.5. Sub-contracting risk ➜ Modular Buildings Taking into account the variety of modular building installation and set-up sites, the Group uses a significant number of sub-contractors. The Group has implemented regular monitoring procedures for sub-contractors. Moreover, the risk is covered by insurance. ➜ Freight Railcars The Group provides maintenance of rail equipment as an Entity in Charge of Maintenance. The Group does not have its own workshops and has concluded agreements with workshops whereby they will carry out maintenance for TOUAX. To limit quality risk, the Group has introduced control systems at all levels and has daily contacts with the workshops. 4.4.6. Seasonal variation ➜ Modular Buildings The construction and civil engineering business experiences seasonal variations, which can slow down the division's business at certain times of the year. To guard against this risk, TOUAX strives to balance its business portfolio with long-term contracts in non-seasonal market segments. ➜ River Barges The volume of goods transported varies from season to season and from year to year. The level of demand depends in particular on agricultural production cycles. To compensate for this, the Group concludes long-term leases. 4.4.7. Commercial risk ➜ Shipping Containers Worldwide economic growth, particularly concerning international trade, has a major impact on the demand for shipping containers. Growth in the sector was confirmed in 2011 generating demand for shipping containers. In addition, large ships ordered by the shipping companies arrived on the market, resulting in a need for containers. Consequently, the average utilization rate of shipping containers increased in 2011 to 97 %. In order to limit the impact of economic cycles, the Group has entered into long-term, fixed-price agreements and increased sales of secondhand containers. ➜ Modular Buildings The effects of the crisis have lessened, in particular in the construction & civil engineering market. Daily prices and utilization rates have increased. Prices went up on the whole, with favourable market conditions for leasing companies, in particular in Germany, Poland and the Czech Republic. At local level, failure to return to a normal level of business will prevent price increases and will have a more significant impact on the operating margin. In order to protect itself against falling prices and a drop in the utilization rate, TOUAX is diversifying into segments and regions where prices remain at adequate levels and is developing its equipment sales businesses. ➜ Freight Railcars As volumes of goods transported did not significantly increase in 2011, the lessees continued to optimize management of their fleets, continuing to return equipment or refraining from leasing new equipment. TOUAX has adapted its commercial offer in order to maintain its utilization rate. It should be noted however that demand by customers varied according to the type of equipment. Since railcars are mobile assets, the Group endeavours to reposition the equipment, not only in different countries: the Group has also diversified its range of equipment so that it is better-suited to customers' requirements. ➜ River Barges The profitability of this business is affected by the highly competitive nature of the transport market, combined with the effects of weather conditions and seasonal variations. The Group has decided to refocus on the leasing business. There is demand for barges from players in the river transport sector, and on the whole there was a big increase in most of the basins where the Group is present. 4.4.8. Management risk A considerable portion of the container fleets and freight railcars managed by the Group belongs to third-party investors or investment companies owned by institutional investors. Management contracts govern relations between each investor and the Group. The Group does not guarantee any minimum revenues and, under certain conditions, investors can terminate the management contract and request that their assets be transferred to another manager. TOUAX has reduced the risk of terminated management contracts by diversifying the number of investors. A report summarizing the assets under management is produced every month. Not one investor has withdrawn management of its assets from the Group in the last 20 years. Risk factors 25

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