This includes the following types of risk:

• foreign exchange transaction risk, that is the risk that the value of a financial asset or liability, a forecasted transaction or a firm commitment, fluctuates due to changes in exchange rates;
• foreign exchange translation risk, that is the risk that the translation of the assets, liabilities, costs and revenues relating to net investment in a foreign operation into the reporting currency gives rise to an exchange gain or loss.

The Amplifon Group’s foreign exchange transaction risk relates to:

• transactions in which the costs or sales revenues are denominated in currency other than the local currency: this is the case in a few, less material countries (Israel, Canada and the GAES Group subsidiaries, acquired in 2018, in South and Central America) where purchases are made in euros or US dollars. The currency risk stemming from the reorganization and centralization of purchasing is gradually becoming more substantial as the Parent Company is assuming the role of “purchasing center” for the whole Group, managing the purchases of goods directly which are then resold to the subsidiaries. The purchases from suppliers are, however, made in the same currency used in the subsidiaries’ invoices. This activity began in the latter part of 2020 and, to date, has only involved three subsidiaries;
• other intercompany transactions (medium/long-term and short-term loans, charge backs for intercompany service agreements, chargebacks for marketing costs incurred to support the markets, intercompany dividends) which result in currency risk for the companies operating in currencies other than that of the intercompany transaction

Foreign exchange translation risk arises from transactions in the United States and Canada, the United Kingdom, Switzerland, Hungary, Poland, Israel, Australia, New Zealand, India, China, Egypt and, as a result of the GAES acquisition at the end of 2018, in Chile, Argentina, Ecuador, Colombia, Panama and Mexico.  

Group strategy: 

Foreign Exchange transaction risk

The Group's strategy aims to minimize the impact of currency volatility on the income statement and calls for significant positions in foreign currency to be hedged against foreign exchange risk through specific derivative instruments. These include: (i) bonds issued in US dollars by Amplifon S.p.A. and subscribed by Amplifon USA Inc, (ii) dividends approved, but not yet paid by the Australian subsidiary denominated in Australian dollars and the American subsidiary denominated in US dollars.

With regard to operating procedures, when possible, Amplifon Group covers the risk using a natural hedge developed by maintaining currency deposits in the banks account of the subsidiary exposed to this risk for an amount commensurate with the exposure to the suppliers.

Natural hedges are also preferred by the Parent Company which, as a result of Global Procurement, supply of intercompany services, and dividends has receivables and payables in different currencies.

The development of Global Procurement and the Group-wide roll-out will increase the exposure to currency risk. This is monitored closely and any risk exposure linked to differences in assets and liabilities will be adequately hedged using instruments that have already been identified.

The loans between the Australian and New Zealand companies and between the American and Canadian companies are considered equity investments insofar as the loans are non-interest-bearing and not expected to be repaid. The impact of exchange differences is recognized directly in the translation reserve at equity without passing through the income statement.

The risks arising from other intercompany transactions worth less than €1 million (or the equivalent if denominated in another currency) are not hedged as the amounts are not material.

Foreign Exchange translation risk

The foreign exchange translation risk, in accordance with the Group Treasury Policy, is not hedged. Overall, the impact of the foreign exchange translation risk can be seen in the Group’s Euro denominated EBITDA which was around €3 million lower than the Group’s total EBITDA. The Argentinian subsidiary operates in a high-inflation country but, as the size of the subsidiary is immaterial, the impact on the Group is not significant. 

 

Interest rate risk includes the following situations:

• fair value risk, namely the risk that the value of a fixed rate financial asset or liability changes due to fluctuations in market interest rates;
• cash flow risk, namely the risk that the future cash flows of a floating rate financial asset or liability fluctuate due to changes in market interest rates.

In the Amplifon Group fair value risk arises on the issue of fixed rate bonds (private placement and Eurobonds). The cash flow risk derives from floating rate bank loans.

The Group’s strategy is to minimize cash flow risk, especially with respect to long-term exposures, through a balanced mix of fixed- and floating-rate loans and assessing whether to switch floating-rate borrowings to fixed-rate when each loan is taken out, as well as over the life of the loans including in light of the current market rates. In any event, at least 50% of the debt must be hedged against interest rate risk. At 31 December 2020, the Group’s medium/long- term debt stems for €701 million from floating rate bank loans, €528 million of which had been swapped to fixed rate debt at the date of this report.

The fixed-rate capital market issues (US private placements and Eurobonds) have yet to be converted to floating-rate debt as currently interest rates are low and the possibility that they will increase is limited.

The Benchmarks Regulation (BMR) which also affects Euribor and could have an impact on hedges will become effective in 2022. The Amplifon Group does not believe that the impact of the reform will be significant.

Credit risk is the risk that the issuer of a financial instrument defaults on its obligations resulting in a financial loss for the holder/investor.

In the Amplifon Group credit risk arises from:

(i)        sales made as part of ordinary business operations;

(ii)       the use of financial instruments that require settlement of positions with other counterparties;

(iii)      the loans granted to members of the indirect channel and commercial partners in the United States for investments and business development.

With regard to the risk under (i) above, the only positions with a high unit value are amounts due from Italian public-sector entities for which the risk of insolvency - while existing - is remote and further mitigated by the fact that they are factored without recourse, on a quarterly basis, by specialized factoring companies. Conversely, the credit risk arising from sales to private individuals based on installment payment plans is increasing, as is the credit risk arising from sales to US indirect channel operators (wholesalers and franchisees). This credit risk, however, is spread out over a number of partners and the amount owed by any single partner does not exceed a few million US dollars. Due to typical business risks, some may not be able to honor their debts. This would result in higher working capital and credit losses. While each subsidiary is responsible for collection of receivables, the Group has set up a centralized system of monthly reporting relative to trade receivables in order to monitor the composition and due dates for each country, and shares credit recovery initiatives and commercial policies with local management. With regard to private customers, the majority of which do, however, use cash, payment options like installment plans or loans (with terms limited to a few months) are offered. These are managed by external finance companies which advance the whole amount of the sale to Amplifon, while the situation of the indirect channel in the US is closely monitored by local management.

The risk referred to in (ii) above, notwithstanding the inevitable uncertainties linked to sudden and unforeseeable counterparty default, is managed by making diversified investments with the main national and international investment grade financial institutions and through the use of specific counterparty limits with regard to both liquidity invested and/or deposited and to the notional amount of the derivatives. The counterparty limits are determined based on the short-term ratings of each counterparty or, if a public rating is not available, on capital ratios (Tier 1). Transactions with non-investment grade counterparties are not allowed unless specifically authorized by the Group’s CEO and CFO.

With regard to the risk referred to in (iii) above, in the event payments fail to be made on the stores sold, ownership will revert back to Amplifon, while the receivables referred to above, are generally personally guaranteed by the beneficiaries and repayments are typically made when the invoices for the purchases of hearing aids are paid. 

This arises from the possibility that the value of a financial asset or liability may change due to changes in market prices (other than those caused by currency or interest-rate fluctuations) due to both characteristics specific to the financial asset or liability or the issuer, as well as market factors. This risk is typical of financial assets not listed on an active market, which may not be easy to liquidate quickly or at a level close to their fair value. The Amplifon Group does not have investments in these kinds of instruments and, therefore, this risk currently does not exist. 

This risk typically arises when an entity is experiencing difficulty finding sufficient funds to meet its obligations and includes the risk that the counterparties that have granted loans and/or lines of credit may request repayment. This risk became particularly significant in 2020 in the wake of the Covid pandemic.

Toward this end, Amplifon implemented a series of measures and actions which made it possible for the Group to better manage its financial position, further strengthening its structure and solidity. More in detail:

• the company resolved not to proceed with the payment of a dividend to shareholders, allocating the entire profit for 2019 as retained earnings;
• a series of measures were adopted which focused on cost containment, reducing and redefining investments, quickly accessing all the tools made available by the governmental authorities, along with other operational initiatives and the management of working capital;
• the Group’s financial structure and liquidity position were further strengthened by refinancing debt, extending maturities and gathering new financing for a total of more than €1 billion.

In this way the Amplifon Group was able to provide ample headroom and ensure the flexibility needed to take advantage of any opportunities to consolidate and develop business that might materialize. 

 At the end of the year available short-term credit lines amounted to €201 million and had not been utilized. Irrevocable credit lines amounted to €195 million and were unutilized at year-end.  The debt is primarily long-term with the first significant maturity, which cannot be extended, in 2025.

The measures described above, the increase in recurring margins posted despite the drop in revenues caused by the Covid-19 outbreak, and the strong recovery of the business in the second part of the year achieved despite the new lockdown measures implemented in the fourth quarter in the main European markets following the second wave of the pandemic, indicate that there is no significant liquidity risk, at least in the short-term.  

Hedging instruments are used by the Group exclusively to mitigate, in line with company strategy, interest rate and currency risk and comprise exclusively financial derivatives. In order to maximize the effectiveness of these hedges the Group’s strategy calls for:

• large counterparties with excellent credit standing and transactions which fall within the limits determined in the treasury policy in order to minimize counterparty risk;
• the use of instruments which match, to the extent possible, the characteristics of the risk hedged;
• monitoring of the adequacy of the instruments used in order to check and, possibly, optimize the structure of the instruments used to achieve the purposes of the hedge.

The Group’s Treasury Policy also defines the rigorous criteria to be used when selecting counterparties.

The derivatives used by the Group are generally plain vanilla financial instruments. More in detail, the types of derivatives used include:

• cross currency swaps;
• foreign exchange forwards.

On initial recognition these instruments are measured at fair value. At subsequent reporting dates the fair value of derivatives must be re-measured and: 

(i)                  if these instruments fail to qualify for hedge accounting, any changes in fair value that occur after initial recognition are taken to profit and loss;

(ii)                if these instruments subsequently qualify as fair value hedges, from that date any changes in the fair value of the derivative are taken to profit and loss; at the same time, any fair value changes due to the hedged risk are recorded as an adjustment to the book value of the hedged item and the same amount is recorded in the income statement; any ineffectiveness of the hedge is recognized in profit and loss;

(iii)              if these instruments qualify as cash flow hedges, from that date any changes in the fair value of the derivative are taken to net equity; changes in the fair value of the derivative that are recognized in net equity are subsequently reclassified in the income statement in the period in which the hedged transaction affects the income statement; when the object of the hedge is the purchase of a non-financial asset, changes to the fair value of the derivative taken to net equity are reclassified to adjust the purchase cost of the asset hedged (basis adjustment); any ineffectiveness of the hedge is recognized in profit and loss.

The Group’s hedging strategy is reflected in the accounts as described above as of the moment when the following conditions are satisfied:

• the hedging relationship, its purpose and the overall strategy are formally defined and documented; the documentation includes the identification of the hedging instrument, the hedged item, the nature of the risk to be neutralized and the procedures whereby the entity will assess the effectiveness of the hedge;
• the effectiveness of the hedge may be reliably assessed and there is a reasonable expectation, confirmed by evidence, that the hedge will be highly effective for the period in which the hedged risk exists;
• the hedged risk relates to changes in cash flow due to a future transaction, the latter is highly probable and entails exposure to changes in cash flow which could affect profit and loss.

Derivatives are recognized as assets if their fair value is positive and as liabilities if their fair value is negative. These balances are shown under current assets or liabilities if related to derivatives which do not qualify for hedge accounting, conversely, they are classified consistently with the hedged item.

In detail, if the hedged item is classified as a current asset or liability, the positive or negative fair value of the hedging instrument is included under current assets or liabilities; if the hedged item is classified as a non-current asset or liability, the positive or negative fair value of the hedging instrument is included under non-current assets or liabilities.

The Group does not have any net investment hedges.