Holland Colours carries out a thorough risk assessment on a regular basis that is designed to find appropriate measures to mitigate the risks associated with achieving the company’s objectives. While our risk appetite in general is low, we are prepared to accept strategic and operational risk where this is necessary to achieve our long-term goals. The Executive Management Team revisited the major strategic, operational and financial risks in May 2015. The probability and potential effect of each risk was subsequently assessed with the assistance of EY. The findings, including the risk mitigation program, were discussed and approved by the Supervisory Board.
Major strategic risks
This concerns the risk associated with macroeconomic and geopolitical developments in sales areas relevant to Holland Colours, as experienced last year in China, Indonesia and Eastern Europe. This also includes the risk of instability in the financial markets, to the extent that this affects the customers of Holland Colours. Such developments can have a material effect on the present and future revenue streams of Holland Colours. These risks are mitigated by the geographical diversification of Holland Colours and the distribution of its revenue across its various focus markets.
Holland Colours also acknowledges the risk that the company could lose its innovative character, meaning that it would be less able to develop or optimize its products in line with a change in market demand. This risk is managed by means of active cooperation between the central Research & Technology department and the application laboratories of the three divisions. The link with the market is further strengthened by the appointment on May 1, 2016 of the Director Global Marketing.
Market and competition
This risk concerns the possibility that competitive actions could threaten the market position and/or profitability of Holland Colours. Market risk varies per market. For instance, in the Packaging market there is intense competition and a high level of price elasticity. In other markets, such as Building & Construction, the more specific technology developed by Holland Colours offers some degree of protection. Holland Colours mitigates this risk by applying for patent protection for new products where this is relevant, such as recently was the case for an additive for Packaging. In addition, Holland Colours is known for its customer-specific service, which our customers cite as a reason to continue doing business with Holland Colours.
This concerns the risk of failed or delayed projects that are relevant for the realization of the strategic corporate objectives. To mitigate this risk, the number of projects running in parallel has been restricted. Next to that, a set of strict, simple guidelines and requirements have been established for a project to meet in its various stages, as well as regular updates and reviews in the Executive Management Team. Projects may in principle be initiated at any level and are then subject to an approval procedure that is directed at Division and/or Executive Management level. Innovation projects are controlled by the Research & Technology department, with decisions being made by the Executive Management Team. In the execution phase, a centrally controlled ‘stage gating’ process is used where relevant to continuously monitor costs, scope and market relevance.
The complexity and speed of change in the external environment in which Holland Colours operates forces the organization to be agile and flexible without sacrificing efficiency and compliance. The organizational model of Holland Colours, with active employee participation and rather broad responsibilities for regional and local management, encourages our employees to be creative and productive. The right amount of central functional direction (Purchasing, Research & Technology, Finance & ICT, Operations and Legal Affairs) and coordination at high level also ensure that synergies and efficiency are achieved where relevant. The internal management organization is further strengthened by means of the financial reporting and budgeting system, frequent visits from Apeldoorn to the sites and the annual Operational Meetings at which the Divisional Management Teams exchange relevant experiences.
Principal operational risks
Raw materials are an important element in the end products of Holland Colours. Availability is usually ensured by means of a dual sourcing policy. The prices of raw materials may fluctuate widely for various reasons, meaning that Holland Colours is exposed to the risk that higher prices cannot always be passed on to customers, or only with some delay. Furthermore, the price and availability risk is mitigated by the central coordination of strategic purchasing including price and delivery agreements.
Board of Management and employees
Holland Colours operates in a decentralized organization structure. The Divisional Management Teams contribute to the strategy of Holland Colours as set by the Executive Management Team and ratified by the Supervisory Board. Subsequently, the Divisional Management Teams have an important degree of independence to determine regional business policy and take decisions. Not having the right person in the right place forms a risk for the company. The organization’s relatively limited size also means that there is relatively high dependency on key personnel. This is addressed in paying sufficient attention to succession planning, management development and evaluation and performance management.
Product liability and safety
Holland Colours has small to medium size production processes. Whenever production control has a relatively low level of automation, the risk of human error increases. Holland Colours subjects its products to preventive checks and several of its sites are ISO certified. Holland Colours has a designated product reporting process and standard working instructions, and improvement measures are identified and implemented using the Lean approach. Product liability risks are covered by written agreements with customers and suppliers, as well as by insurance. Health and safety risks are mitigated by paying extensive attention to working conditions, sick leave and accident prevention, also making use of the principles of the OSHAS safety management system.
Continuity of IT systems
From the perspective of cost and risk management, IT systems such as the globally implemented ERP system are managed centrally where possible. Within the road map developed for the modernization of the information systems in the coming years, the hardware for the ERP system was replaced early 2016. The management, back-up and contingency facilities have been outsourced to an external data center, subject to the requirement that the supplier is ISO 27001 certified (data security). A seperate project has been initiated in which the network policy (access, rights and settings) of all servers and networks within Holland Colours will be consolidated and centralized. Both these projects should increase the availability, continuity and security of our IT systems.
Virtually no greenhouse gases are produced during the production of color concentrates by Holland Colours. Water usage is limited, and accordingly the risk of pollution of ground and surface water is also limited. Holland Colours is working to further limit these risks. Environmental coordinators are appointed at local level who know the specific situation and monitor compliance with local legislation and regulation. ISO certification is a significant part of the control measures. The company is also working specifically on the principles of Corporate Social Responsibility.
Principal Financial risks
Financing and interest
Most of the company’s financing has been centralized. The current financing requirement is low. The company’s financing is subject to compliance with various bank covenants, most importantly in relation to the Total Debt/EBITDA ratio. As has happened in the past, the risk that the covenant requirements will not be met during a deep recession cannot be ruled out. Interest rates on long-term loans are usually fixed for the entire term to maturity by using interest rate derivatives where necessary. Overdraft facilities are mainly based on Euribor and Libor plus an agreed spread.
Due to the worldwide presence, whereby the Divisions Americas and Asia use the US dollar as their functional currency, the consolidated balance sheet and income statement of Holland Colours are subject to currency impacts. A distinction is made in this respect between transaction risk and translation risk. Transaction risks are hedged as much as possible by matching incoming and outgoing cash flows at regional level in the functional cash flow. Short-term positions, such as payments due or receivable in foreign currency, are hedged within Europe for a period of 30 days. No currency hedge instruments were open at the closing date. Translation risk is currently not hedged.
The company is a combination of high-tech and craftsmanship.
Rob Harmsen, Chief Executive Officer Holland Colours