Annual Report 2010 - Frauenthal Holding AG

64 Annual Report 2010
Operating Review
oPerational riSk
The production of braking system air reservoirs involves
forming, welding and surface treatment processes. Spring
and U-bolt production involves hot rolling, bending and
tempering, and gives rise to significant fire hazards. All
of these processes are associated with production outage
and safety risks.
These risks are minimised by work and process instructions,
training programmes, continuous maintenance and
testing, and insurance cover. In the case of spring and
pressure vessel production it is also possible to relocate
operations to other sites.
SuPPly riSk
The availability of steel and other input materials is safeguarded
by long-term supplier relationships in the case of
the spring and U-bolt businesses, and by long-term supply
contracts in that of the air reservoir business. However
shortages of raw materials, and sharp increases in the prices
of steel and other production materials would give rise
to supply risks. In most cases agreements with customers
enable steel price increases to be passed on, but only for
part of the year.
Materials procurement is centrally managed by Frauenthal
Einkaufs GmbH, permitting ongoing market monitoring
and regular negotiations with suppliers.
Energy prices also have a significant influence on overall
production costs, and thus on Group earnings. Energy shortages
— particularly of natural gas, which is an important
energy source at our factories — could arise, as many of
our plants are in countries which are heavily dependent on
gas supplies from Russia.
Wholesale Plumbing Supplies Division (SHT Group)
CuStoMer riSk
SHT’s wholesale business involves a large number of customers
in the plumbing trade. Consumers are not directly
supplied. The key success factors are procurement
prices, and terms and conditions, efficient warehousing
and delivery logistics, and the quality and financing of
customer receivables. Where competition between wholesalers
gives rise to fierce battles for market shares this
may lead to price erosion. However other, stabilising
aspects of the customer relationship (product availability,
delivery reliability, finance, technical advice, etc.) mean
that the price of the products is not the sole determinant
of customers’ decisions, and that the risks associated with
price competition can be countered by such aspects of
service quality.
Most of SHT’s customers are tradesmen, and the default
risks are those characteristic of the plumbing trade, which
is predominantly one of small businesses.
SHT has an efficient receivables management system in
place to mitigate this risk. Customer creditworthiness
and credit limits are kept under constant observation so
as to identify insolvency risks at an early stage. Regular
meetings are now held between the central receivables
management unit, and the sales and marketing organisation
in the interests of closer communication, and this
enables any payment delays to be vigorously pursued.
Default risk is also mitigated by taking out credit insurance.
During the year under review bad debts were a
mere 0.4 % of revenue.
Since most of SHT’s customers are small businesses the
default risk is widely diversified. Large projects and the
related risks play a relatively minor role in SHT’s business,
but there are instances of them.
As at the end of the reporting period overdue payments
were equal to 3.6 % of payables – the same level as in
2009.