Risk categories
The analysis of the most recent risk inventory, compiled in 2008 by the Risk Committee, revealed that there are still no risks that could jeopardize the Jungheinrich Group’s continued existence. Risk classes that are material to the Jungheinrich Group are listed below. These also include risks that have gained importance above all owing to the financial crisis. They include risks associated with company financing, liquidity, residual values, counterparty defaults, currency and suppliers.
General and sector-specific risks
Contrary to Jungheinrich‘s diverse service business, the manufacture and sale of new trucks strongly depend on cyclical demand. Therefore, the development is constantly monitored and evaluated based on regular estimates made concerning the material handling equipment market, the competitive environment and capital markets — especially with regard to fluctuations in currency exchange and interest rates — in order to detect indications of the future order trend. The permanent adaptation of production schedules and capacities to expected incoming orders is key to reducing risk. Also included in risk surveys are potential changes to the subsidiaries’ financial situation stemming from market developments.
Triggered by the intensification of the international banking and financial crisis, the global economic downturn had a delayed effect on the material handling equipment industry. In the fourth quarter of 2008, the world market shrank by some 40 per cent, with Europe’s market volume contracting by more than 30 per cent. Market declines in some Eastern European countries were much more significant. As evidenced once again by the first two months of this year, the size of the material handling equipment, warehousing and material flow technology markets of relevance to Jungheinrich can be expected to be much smaller overall in 2009, compared with 2008. Based on appropriate risk scenarios, Jungheinrich prepared itself to deal with the deterioration in basic conditions and initiated measures in good time, in order to react to the impending consequences. Besides trimming temporary staff and work time account balances as well as introducing short-time work, an investment project designed to expand capacity was postponed for the time being. The unusually weak economic development will also have an impact on the short-term hire and used equipment business, albeit to a slightly lesser extent. Thanks to its high proportion of services from a single source with fairly stable shares of sales, the Jungheinrich business model demonstrates its special strength, especially in recessionary phases.
Long-term prospects of sustained growth in logistics resulting from the increasing division of labour brought about by globalization exist despite the financial and economic crisis. A rising number of countries has a mounting need for modern material handling technology and logistical systems. Thanks to its up-to-date and innovative range of products, its broad international customer base, and its positioning as a full-line supplier and intralogistics service provider, Jungheinrich is well equipped to significantly partake of this development as well.
Consolidation continues to progress in the material handling equipment sector, as recently evidenced by the acquisition of a warehousing technology specialist by a competitor in the period being reviewed. This will intensify crowding-out and price-based competition even further. On the strength of its business model, Jungheinrich is convinced that it is well positioned to prevail against the fierce competition in this context as well.
Operational risks
The consolidation of demand witnessed for several years causes the pressure on prices on the market to rise and thus constitutes an ongoing risk, not just in times of a slack market environment as these. The Jungheinrich Group reacts to this situation mainly by expanding its direct sales and service offerings. This improves market penetration and customer loyalty.
The rising trend among customers to lease new trucks will intensify in the year underway. The financial crisis will make it more difficult for customers to self-finance investments and obtain financial leeway. Jungheinrich’s range of financial services offers the customer a sensible alternative against this backdrop. Potential default risks arising from such transactions later on are limited via extensive creditworthiness checks before contracts are concluded and by taking out credit insurance for sizeable projects. Bad debt occurring despite these efforts can be kept low by recovering trucks early on and reselling them as used equipment. The residual value risk that may result from differences between the carrying amount and market price of leased products is reviewed on a quarterly basis. If the present market value is below the guaranteed residual value, this risk is covered by building suitable provisions and making valuation allowances on used equipment inventories when preparing the balance sheet. A Europe-wide lease agreement database ensures the uniform assessment of risks associated with financial service contracts throughout the Group.
In 2008, Jungheinrich had a short-term hire fleet of an average of approximately 26,000 trucks. The risk of prolonged standstill was minimized by constantly adapting the fleet‘s size and structure to market demand and customer requirements, thus ensuring a high degree of utilization.
Procurement and purchasing risks
Major risks result from increases in the price of raw materials, components and commodities as well as from quality-related problems and supplier defaults. As in the preceding year, attention was mainly directed to the substantial rise in steel, lead, copper, aluminium, fuel and energy procurement costs. Strong demand for raw materials and associated price hikes on world markets persisted in the first half of 2008, before relenting over the remaining course of the year due to the worldwide economic cooldown. Material prices continued to rise despite the onset of the decline in demand, owing to lead times for materials purchasing at production plants and in the central sourcing of spare parts supplied to the Jungheinrich service network groupwide. Jungheinrich partook of the steep downward trend at the end of November and in December 2008, placing orders for the most important components at reduced purchasing prices. The lower price level will have a positive effect on fiscal 2009, especially in the second six months. There were no supply bottlenecks in the period under review. The quality of incoming goods has improved considerably. This resulted in a more favourable supplier assessment. Only a few vendors are in financial difficulty, despite the current financial and economic crisis. However, Jungheinrich is inclined to expect the situation to deteriorate and therefore stays in very close contact to its suppliers, in order to be in a position to react in good time if necessary.
Financial risks
Interest rate and currency risks are the major risks in this category. They are monitored regularly. Changes in interest and currency exchange rates expose the Jungheinrich Group to operating risks which are controlled by a special risk management system. Jungheinrich makes use of financial instruments such as currency futures, currency swaps, currency options and interest rate swaps to control these risks. We have defined control mechanisms for the use of financial instruments in a procedural guideline based on the requirements imposed by the German Corporate Sector Control and Transparency Act (KonTraG) on company risk management systems. Among other things, it mandates the clear separation of trading, settlement, accounting and controlling.
In contrast, the international financial crisis is not materially affecting Jungheinrich’s financing at present. The company’s good creditworthiness and robust positioning were valuable assets in securing credit financing for the years ahead. In addition to a short-term line of credit, Jungheinrich has about €300 million in medium-term credit lines with maturities of three to seven years to finance its operating activities. This secures the financing of future growth as well. Credit margins are coming under increasing pressure owing to the banks’ higher purchasing costs. Due to the high level of liquid assets, which Jungheinrich can use to meet its payment obligations at all times, the company has no liquidity risk exposure. Since Jungheinrich pursues a conservative investment policy throughout the Group, the company did not invest in securities (e.g. stocks) that are exposed to share-price or default risks.
The Group is exposed to a counterparty risk that arises from the non-fulfilment of contractual agreements by counterparties, which are generally international financial institutions. On the basis of their credit rating, which is determined by reputable rating agencies, no major risk ensues for Jungheinrich from the dependence on individual counterparties. The general credit risk from the derivative financial instruments used is considered to be negligible. Derivative financial instruments are exclusively used to hedge interest rate and currency risks. As of December 31, 2008, the Group had €178 million in currency hedges on its books (prior year: €109 million). Outstanding currency hedges largely have maturities of less than one year. Jungheinrich had €0.7 million in interest rate hedges for underlying transactions on its books as of December 31, 2008 (prior year: none).
More detailed commentary on financial instruments can be found in Jungheinrich AG‘s consolidated financial statements.
Legal risks
General contract risks are largely eliminated by applying groupwide policies. In addition, material contracts are centrally managed and legal advice is obtained on them by the departments responsible for them. We have not yet been able to end all of the lawsuits pending in connection with the discontinuation of MIC S.A.’s operating activity. At present, the company is not facing any material risks associated with litigation with third parties.