Indesit Company Half-Year Report As of 30 June 2005
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Indesit Company Half-year report as of 30 June 2005 Half-year report as of 30 June 2005 Company bodies: Board of Directors Chairman Vittorio Merloni Chief Executive Officer Marco Milani Directors Innocenzo Cipolletta Adriano De Maio Alberto Fresco Mario Greco Carl H. Hahn Hugh Malim Andrea Merloni Antonella Merloni Ester Merloni Luca Cordero di Montezemolo Roberto Ruozi Board of Statutory Auditors Chairman Angelo Casò Auditors Demetrio Minuto Paolo Omodeo Salè Alternate Auditors Maurizio Paternò di Montecupo Serenella Rossano Human Resources Committee Alberto Fresco (Chairman) Mario Greco Carl H. Hahn Marco Milani Audit Committee Roberto Ruozi (Chairman) Innocenzo Cipolletta Hugh Malim Vittorio Merloni Innovation and Technology Committee Members who are Adriano De Maio (Chairman) directors Andrea Merloni Vittorio Merloni Marco Milani Members who are Valerio Aisa not directors Enrico Cola Silvio Corrias Marco Iansiti Adriano Mencarini Davide Milone Pasquale Pistorio Massimo Rosini Giuseppe Salvucci Andrea Uncini (Secretary) Representative of the savings shareholders Adriano Gandola Indipendent Auditors KPMG S.p.A. 2 Half-year report as of 30 June 2005 INDESIT COM PANY S.P.A. Registered Offices: Viale A. Merloni 47 - 60044 Fabriano Secondary Offices: Via della Scrofa 64 œ 00186 Rome Share Capital: Euro 102,140,744.40 fully paid Tax Code/VAT No. 00693740425 Ancona Companies Register No. 9677 REPORT ON OPERATIONS DURING THE PERIOD ENDED 30 JUNE 2005 CEO‘s comments The first half of this year has seen a continuation of the competitive conditions that marked the end of 2004, with sharply rising prices for the principal raw materials and lacklustre markets, even in Eastern Europe. During the first six months of 2005, Indesit Company has worked to counter the higher raw material prices that have increased the Group's costs by about 3.5% with respect to the prior year. Action has focused on pricing policy and the containment of sourcing and production costs. Regarding the former, the Group raised selling prices in the principal markets during the first quarter of 2005, achieving excellent results in terms of Average Unit Revenues (+ 2% with respect to the first quarter of 2004). However, partly due to strong competitive action by leading competitors, this strategy resulted in a marked contraction in the volume of sales which were about 10% lower than in the first quarter of 2004. Accordingly, the Group decided to defend market share during the second quarter of 2005, with a more aggressive pricing policy which ensured that sales remained in line with those for the same period in the prior year. As a result, overall volume fell by about 5% during the first six months, with a contraction in price/ mix by about 0.4%. W ith reference to production costs, the reduction programmes were implemented as planned and on schedule, achieving the expected results. In particular, the purchasing of raw materials and components from the so-called "low cost" countries has increased due to the ongoing rationalisation of the supplier base. At the same time, the volume of production has risen further at the factories opened during 2004 in Lodz (Poland) and Lipetzk (Russia), which are nearing full capacity operating levels. The plan to redistribute production has also continued, with the final closure of the factories in Portugal, the start of work to convert the Melano factory (Italy) from cooling to cooking and approval of the plan to restructure the factory at Thionville (France). Incisive work has also begun on the containment of selling costs and general and administrative expenses. The Group has already achieved results in this area and further significant efficiencies appear to be achievable. Implementation of the capital investment plan was in line with expectations. Investment during the first half of 2005 amounted to about 70 million euro, compared with the total planned for the year of around 140 million euro. Expenditure was mainly concentrated on the introduction of new products (about 30%) and the improvement of manufacturing efficiency (about 46%). The strategy to strengthen capabilities in the area of product innovation has seen major progress with the creation and activation of the new "Innovation and Technology" Department which focuses on medium/long-term technological innovation across product lines, with a view to seizing the escalating opportunities offered by technology and transforming them rapidly into new product features and performance. 3 Half-year report as of 30 June 2005 Many new products were introduced during the first six months of 2005. In particular, several product categories previously unavailable on the market were presented, including the drawer refrigerator available for the 90 cm built-in modules and the new —Extendia“ line of large products (such as the refrigerator with built-in vacuum and home bar and the new washing machine with a capacity of 8.5 kg). The laundry segment has been further strengthened by the introduction of the new standard-size washing machines with a capacity of 7 kg and the start of local production for the CIS markets of the new —slim 33 cm“. The Experience range has been completed in the built-in segment, with elements that coordinate well with the minimalist style of the ovens. Lastly, in the cooling segment, all Group brands introduced the new 60 cm platform during the first half of 2005, with excellent features for the category (A++ Energy, integrated vacuum system, full no-frost technology, touch control panel, freezer compartment with adjustable temperature). In addition to the Innovation Department mentioned above, three further important organisational changes were made in order to face up better to future challenges. An Industrial Technical Department has been created in order to focus better on the development of products and the improvement of production processes. To achieve this, Product Technical Departments have been established by line(Cooking, Dishwashing, Cooling, Laundry), each with their own R&D, Engineering and Product Quality units. At the same time, industrial areas have been identified which encompass the manufacturing plant present in a geographical zone. In addition to guaranteeing process improvements, this also stimulates all forms of organisational synergies. Secondly, a Global Product Planning function has been established to guarantee the profitability of products via the definition and management of the product portfolio, the planning and allocation of investment in products, and the management of product development projects. Finally, the Sourcing and Logistics Departments have been combined within the new Supply Chain Department, as part of the ongoing drive for greater organisational efficiency and the search for all possible forms of synergy. Market conditions are expected to be difficult during the second half of 2005, with a contraction in demand in several major markets œ particularly the UK œ and a smaller recovery in the markets of Eastern Europe with respect to expectations at the start of the year. Consistent with the long-term objective, the Group remains focused on defending and increasing its market shares, which œ by year end œ are expected to be at the same overall levels as 2004. There will be a number of important product initiatives during the second half of the year, with the launch of the new Scholtes cooking line and, in particular, the new range of Aqualtis washing machines. The results of this action, in economic terms, will however be more significant next year. W ith respect to initial plans, the industrial rationalisation and restructuring work already under way will be accelerated with a view to recovering additional profitability via the containment of costs. Despite the current sector difficulties, the Group expects the second half of the year to be better overall than the period just ended. Sales of household appliances in Europe Sales of white goods to retailers (—industry shipment“) declined in volume terms during the first half of 2005, with a drop of 2.4% in W estern Europe and 2.8% in Eastern Europe. In W estern Europe, the performance of the British market (-11%) was particularly weak after five years of continuous, sustained growth. In Eastern Europe, the markets of the Czech Republic, Poland and, in particular, Hungary remained under pressure following difficulties during the second half of 2004, while there was an upturn in Romania (+29%). 4 Half-year report as of 30 June 2005 The CIS countries have continued to report healthy growth (+6%), although less than in prior periods. Retail prices contracted by 0.8% in W estern Europe and 1.5% in Eastern Europe (excluding the CIS countries), thus confirming the difficulties faced by the entire sector. Currency M arkets W ith reference to the principal currencies used by the Group, the average exchange rate for the Euro during the first half of 2005, with respect to the comparative period in 2004(*), rose by 1.9% against the British pound, 4.7% against the US dollar, 1.8% against the rouble and 1.1% against the Turkish lira, but fell by 13.9% against the Polish zloty. Significant events of the period and subsequent to period end In January 2005, following the signing of a commercial joint-venture agreement with W LS (W uxi Little Swan Company, China's leading producer of laundry products), a new company called W UXI Indesit Home Appliances Co. Ltd, was formed in which Indesit Company holds a 70% interest (W LS, 30%). This joint venture has acquired a line of business for the production of dishwashers from W LS. Initial production, due to start during the second half of 2005, will mainly be exported. A further 8% of the capital of General Domestic Appliances Holdings Ltd was acquired in March 2005, raising the Group's interest in this company to 76%. The shareholders' meeting of Indesit Company S.p.A.