Risk and opportunities report
Risk Management System
SURTECO SE and its Strategic Business Units are exposed to a large number of risks on account of global activities and intensification of competition. In order to ensure long-term growth and increase in corporate value, the Group avoids unreasonable risks. The remaining risks are reduced and managed by taking adequate measures. Foreseeable risks are covered by taking out insurance policies and deploying derivative financial instruments, if this is feasible at reasonable commercial conditions. However, it is not possible to exclude the possibility that insurance cover or hedging with financial instruments is inadequate in individual cases or that appropriate protection cannot be obtained for specific risks.
The Board of Management of the SURTECO Group is responsible for policy relating to risks and for the internal management and controlling system. The Board of Management works together with the subsidiaries to identify risks. The management of the subsidiary companies implements the instructions of the Board of Management and is responsible within this framework for risks that it enters into in the course of its business activities. The management includes the employees in the course of exercising their management functions.
The Risk Management System is an integral element within the Group’s strategy and planning process. It is made up of a number of modules which are integrated in the entire structural and workflow organization of SURTECO and its subsidiary companies. There is no independent structural organization. In order to measure, monitor and control risks, SURTECO SE uses a detailed controlling system. The controlling system encompasses the key controlling parameters specific to the industry and sector. Apart from regular reporting to the Board of Management and Supervisory Board, managers have a duty to report risks that occur unexpectedly without delay. The usefulness and efficiency of risk management and the controlling systems are monitored internally at regular intervals by the Board of Management and the managers of the subsidiary companies, and externally by the auditor. SURTECO is continually developing measures directed towards risk avoidance, risk reduction and risk hedging while also taking advantage of any business opportunities that arise.
The risks described below may impact negatively on the net assets, financial position and results of operations for the Group. Additional risks that are unknown at this point in time and that are currently believed to be very low could also affect business activities in the future.
The significant risks for SURTECO SE are as follows:
Strategic business risks and opportunities
Macroeconomic risks and market risks
In the market supplying coating products for the furniture and interior design industry, a local presence in the relevant countries and markets is crucially important. This enables customers to be supplied quickly and permits trends in regional markets to be identified at an early stage. SURTECO is very well positioned in international markets with 15 production and sales sites, and a further 17 sales sites.
The development of the business is highly dependent on economic performance in the furniture and construction industries operating in the countries and markets where SURTECO supplies its product range. Economic fluctuations in our sales markets can exercise a very negative effect on business development. The continuing internationalization of the Group means that fluctuations can be compensated in individual countries. The economic trends and sales development in individual markets are monitored continuously so that changes in trend can be anticipated or identified at an early stage. The qualitative and quantitative findings are recorded and evaluated with the assistance of a differentiated internal reporting system. They are then subjected to detailed assessment and analysis. Any deviations from budgets, the feasibility of planning goals and the occurrence of new monetary and non-monetary risks are highlighted and analyzed. The business is then managed on the basis of the results of reporting. The furniture industry is anticipating a shrinking trend for the fiscal year 2009. Detailed information on the development of the global economy and the furniture industry is provided in the outlook report.
In addition, cost leadership is a key factor for the market positioning and economic success of SURTECO SE. This entails a complete and diversified product portfolio tailored to the needs of the market and highly efficient operating processes. During the course of the business year under review, the local presence was further expanded by the sales location in Turkey, the launch of production in Chile in November 2008, and the production startup for SBU Plastics at the Chinese plant in Taicang.
Technological risks
Technological leadership is crucial for future profitability. The company’s technologies are continually being developed to retain this leadership. Technological development within the sector and related industries are also monitored and analyzed in order to retain leading-edge capability.
Competitive risks
SURTECO is generally very well positioned in the relevant markets. However, competitive pressure continues to growth throughout the world. New providers have come on the scene as a result of increases in production depth at major printers and new, locally active surface manufacturers who are operating in selected product areas. This market consolidation could exert a negative effect on revenues.
SURTECO is countering massive pressure on prices by expanding and strengthening existing business, introducing innovative products and not least by further increasing efficiency.
Operating risks
Procurement risks
SURTECO SE is dependent on outsourcing from other providers for the procurement of semi-finished products and services. Inclusion of third parties in the equation creates risks such as unexpected supply difficulties or unforeseeable price increases resulting from market bottlenecks or currency effects, which could impact negatively on results. The Group meets risks associated with supply by a process of continuous material and supplier management. The measures involve monitoring the market intensively, carrying out in-depth quality inspection on the basis of jointly agreed specifications and arranging supply contracts. There is a risk of increasing energy costs that is rising over the medium to long term. Following the sharp price rises for plastics and other chemical products during 2008, prices are expected to ease in 2009. However, prices are projected to settle at a higher level over the medium term.
It is a fundamental fact that rising energy prices and price increases for raw materials and consumables inevitably lead to additional expenses in production. This means that further financial impacts can only be compensated by price increases.
IT risks
Ensuring secure operation of all business processes requires constant monitoring and adaptation of the information technologies used in the Group. Against the background of a growing potential for risk based on increasing integration of computer-supported business processes in communication between the Group companies and in communication with customers, suppliers and business partners, ongoing development of the measures used to make information secure are a top priority. Risks relating to the availability, dependability and efficiency of the IT systems are limited by the ongoing measures SURTECO adopts to harmonize our systems with prevailing conditions and requirements. The Group reacts selectively to increased demands placed on the security of our systems within the scope of comprehensive security management. These measures also include implementation of uniform software systems within which all production-related and commercial aspects are integrated and processed efficiently.
Personnel risks
The success of the company is closely associated with provision of qualified staff at all levels. Shorter innovation cycles and increasingly international links place ever more stringent demands on the capabilities of specialist and management staff. In order to safeguard the necessary qualifications in the relevant functions and countries, members of staff at SURTECO SE receive regular career training both inside the company and with external providers. Information on apprenticeship training and career training is provided in the section entitled people and training.
Production risks
The continuous improvement process ensures that potential for efficiency increases can be identified and implemented continuously. Furthermore, production procedures, manufacturing technologies, machinery assets and workflows are continually being developed and optimized. Systems and equipment are maintained and serviced to a high standard and employees receive intensive training. If customers make complaints, the causes of complaint are carefully researched. The environmental safety of products and production is ensured by environmental officers.
Financial risks
Interest and currency risks
The global nature of the business activities of the SURTECO Group results in delivery and payment flows in different currencies. Invoicing in euros is the preferred method of billing. Currency risks arising from the procurement of raw materials are negligible since the majority of procurement is carried out in euros. Conversion of business figures and balance sheets from foreign subsidiaries into euros can entail risks which can only be hedged to a certain extent.
Interest risks are mainly incurred for short-term financial liabilities. The majority of long-term financial liabilities are structured with fixed-interest rates. SURTECO SE meets the remaining interest and currency risks by hedging positions with derivative financial instruments and regular and intensive observation of a range of early-warning indicators. In order to limit exchange-rate risks associated with changes in interest rates, the Group operates a policy of systematic currency and interest management. This is controlled centrally by the holding company in Germany.
Liquidity risks
Corporate Treasury monitors and controls the development of liquidity for the major subsidiary companies. This provides an up-to-date picture of liquidity development at any time. The high levels of free cash flow and the short payment targets mean that SURTECO has adequate liquid funds continuously available. There is also the option of drawing on open credit lines.
However, earnings and liquidity can be compromised by default on accounts receivable from customers and non-compliance with payment targets. The Group counters this risk by regularly reviewing the credit rating of contracting parties and carefully monitoring default with customers. The risk arising from debit balances in accounts payable is low on account of the broadly based customer structure and appropriate trade credit insurance policies. The difficult economic situation is likely to entail higher levels of default on receivables and relatively low cover from trade credit insurance.
Financing risks
The refinancing of the Group and the subsidiary companies is generally carried out by SURTECO SE. The majority of the Group’s financial liabilities have residual terms of more than five years (see also maturity structure in the Notes to the Consolidated Financial Statements item 23) and is structured with fixed interest rates. Repayment of significant long-term loans is not necessary in the business year 2009. The Group operates with a wide range of lenders comprising insurance companies and banks. Financial indicators were agreed with lenders at standard market conditions in loan agreements and these have to be met by SURTECO.
Fluctuations in value for securities/derivatives
In January 2008, SURTECO SE acquired a share package amounting to 3.02% of the share capital in Pfleiderer AG, Neumarkt. The turbulence in the financial markets and the associated massive falls in share price meant that an impairment of 11.5 million euros had to be carried out for the share package in the business year 2008. The possibility of further impairments cannot be excluded as a result of sustained weakness in the equity markets and the declining share price of Pfleiderer AG.
The derivative financial instruments concluded by the Group for hedging purposes and in order to reduce risks are valued on a monthly basis. If there are significant fluctuations in underlying values such as interest rates, this may exert a negative impact on the earnings of the Group. Item 28 in the Notes to the Consolidated Financial Statements provides detailed information on the derivative financial instruments of the Group.
Risks from corporate governance/compliance
Changes in regulatory requirements, customs regulations or other barriers to trade, as well as possible restrictions on price or foreign currency could impact negatively on our sales and profitability.
The companies in the Group have formed adequate provisions to meet warranty claims. Part of the warranty risks have been covered by commercially effective insurance policies. Risks are reduced by the high level of production certainty and the outstanding quality standard for the products manufactured by the SURTECO Group acts to reduce risk. SURTECO SE is not currently involved in any court or arbitration proceedings that could exert a significant influence on the commercial situation of the Group.
Overall risk assessment
SURTECO regularly monitors the achievement of business goals, as well as the risks and risk limitation measures. The Board of Management and Supervisory Board are informed of any risks at an early stage. An overall analysis of all risks shows that the main risks relate to market risks. These include developments relating to price and volume due to economic conditions prevailing in customer industries or sectors, and in the procurement markets.
Effects of the financial crisis
The financial crisis is exerting a significant effect on new-build activity so that reduced volumes are anticipated for the business year 2009. The long-term refinancing of the Group means that the company is not significantly affected at present by the shortage of lending capacity and the higher costs of refinancing. It is currently assumed that it will be possible to meet the financial indicators agreed with lenders in the business year 2009. However, a risk may emerge in an increasingly negative development of the global economic framework conditions.
The defaults on receivables to be expected cannot be quantified due to the lack of empirical data and historically low write-off rates in the SURTECO Group. The volatility of raw material prices and currency parities is likely to be less marked in the business year 2009 than in 2008. The management has responded to the financial crisis with a rigorous programme of cost-cutting, personnel adjustment measures and production relocations. Future investments will only be implemented following careful consideration of all the advantages and disadvantages.
Summary
The early-warning risk identification system has been checked by our auditors. It meets the requirements of § 91 (2) of the Stock Corporation Act (AktG). Review of the risk situation has revealed that thanks to efficient, regular and comprehensive risk management the risks at SURTECO SE are limited and transparent, and there are hence no risks that alone or in combination with other risks could endanger the continued existence of the company and future risks likely to endanger existence as a going concern cannot currently be identified.
SURTECO has good prospects for overcoming this difficult phase in the global economy on account of the timely action taken and the financial strength of the company. The Group is also likely to benefit from the position of competitors who are less well placed.
