The risk appetite of Holland Colours is best reflected in our strategic ambition. Our main focus is to defend our global market share with products that are close to our original core. In order to maintain a sustainable base for the long-term profitability of our company, we are also looking for growth. We do this in a variety of ways, including the selective extension of our technology base driven by in-house product development and/or third-party partnership.
Furthermore, as is clear from the strategy, we will continue to foster business opportunities in adjacent product areas and market segments to apply our extensive color know-how in an effective and profitable manner.
Our updated strategy is well focused, stays close to an already proven technology and product core while also incorporating new market trends.
Our company culture is an important driver for the successful execution of our strategy. Holland Colours is a partly employee-owned company with short, informal reporting lines and a strong focus on diversity. Our caring culture makes us effective to bridge the needs of the market with our technological and production capabilities on a global scale and based on a holistic approach: in our company there is no room for ‘individualistic’ behaviors.
Our divisions are, in close cooperation with the central functions, responsible for maintaining an effective risk and control environment as part of day-to-day operations.
All directors and controllers of the operating companies have signed a statement concerning compliance with the guidelines and procedures that form the basis for the financial reporting and the internal audit.
During the 2016/2017 financial year, no significant shortcomings were found in the internal risk management and control systems. The company regularly evaluates its insurance cover, the premium it pays and the policy excess that applies.
In early 2017, we hosted a risk management session with senior managers to re-assess the potential risks to our company's future, culture, strategy and the chosen CSR values. We set a 5-year horizon for this process.
Each participant submitted as many risks as they saw applicable in the form of a description of the risk, the reasons it might materialize and the consequences for Holland Colours if it were to occur. The risk definitions were discussed in a plenary session, facilitated by a risk management consultant from BDO. The voting on impact and likelihood of the collectively defined risks was done digitally and on an individual basis with a feedback session on outliers in the voting patterns. The team then jointly decided on the top risks we should focus on. The summary below captures the main risks identified and discussed, summarized along four main categories, followed by our conclusion:
These risks refer to elements or trends that could hinder us in reaching our long-term strategic objective.
Changes in market requirements are ongoing both from an equipment point of view (faster, more standardization) as well as product compliance point of view (environmental legislation, REACH, FDA, NIAS). The risk is that Holland Colours is (or is perceived as being) too small to handle these challenges effectively.
This risk is mitigated by the fact that we supplement our product core with third-party complementary technology where needed. This is done in the form of trading products (mainly Asia) and manufacturing alliances (such as our longterm relationship with Gaypa from Italy). As part of the strategic re-focus, we also include the option of a technology-driven acquisition or further partnerships.
Overall, our global presence and strong relationships with key players in both the Packaging and B&C industries continue to be the drivers in defining our product portfolio. In order to protect our technology we apply for patents where feasible.
This risk will continue to have full management attention with a clear focus on developing the right products and technologies. Please refer to the New Products paragraph. In order to stay aligned with market needs during the sometimes long development phases, we make use of the stage-gate process.
We closely track the various dynamics in the competitive landscape. We see, for example, that global players are separating their colorants business or buying compounders or teaming up with others. This provides both challenges and opportunities for smaller players like Holland Colours who do have a global reach serving niche markets from a Caregiver approach. Additionally, apart from North America, we still see limited concentration trends on our customer base. Nevertheless, there is a trend towards standardization of technology and machinery with convertors in the Packaging industry. The impact of brand owners in this segment is also becoming increasingly prominent. Lastly, we experience the impact of supplier consolidation, which drives up the cost of our raw materials. In some cases we are able to reformulate our products yet in other cases (for example, for Tio2) we have to offset the cost increase through higher sales prices.
This relates to the risk of being a relatively small player with a global reach. As such Holland Colours could be stretching its resources too thin while at the same time being unable to reach local markets. We believe that with the different go-to-market models we spread our risk and are well connected to local developments. In the North American region we work with local sales offices. In Europe and Asia we have dedicated sales representatives in the different countries, in some cases combined with dedicated distributors. For efficiency reasons, our product supply remains predominantly regional. From time to time we evaluate the efficiency of the (elements in the) model and make changes where needed. In the past year, for example, we made the decision to close our wholly-owned China entity and continue with local business partners.
These risks refer to insufficient know-how and measures in place for Holland Colours to properly handle the ever-changing compliance requirements. Compliance is a broad area and we are focused on product and production compliance in our risk assessment processes. Please refer to the Corporate Social Responsibility paragraph to read about the measures in place to safeguard a safe environment to work for our employees and actions in place to ensure our raw materials are sourced from respectable companies that adhere to good business practices.
From a preventive point of view, we partner closely with our key customers on the interpretation of new regulations. We gather from industry feedback that Holland Colours is typically well informed and we are valued for our active approach to find solutions. This is done by either re-formulating products and/or changing our internal operations where needed. The latter can also be triggered by customer audits (mainly Packaging). Our manufacturing sites are ISO registered and subject to regular audits (except for our site in Richmond, Indiana, in the USA, which uses a selfimposed audit system).
We also have a structured approach to learn from any incidents that occur. The complaints registration and handling system has been given outstanding notes in many ISO audits for its structure and content. Complaints are discussed immediately by a Quality Assurance team consisting of Sales, Operations, Technical and Quality Management with follow-up on the elimination of root causes. The topic of product compliance and complaint management is on the agenda of the divisional management team meetings while product liability risk is covered in the agreements with customers and suppliers and also insured via third-parties.
Holland Colours continuously monitors elements that could jeopardize the financial health of the company. The risks that are part of the normal conduct of our business (such as currency and credit risk) are listed in the Financial Risk Management paragraph of the financial statements.
The financial risks related to the funding of the company are limited. We redeemed the only remaining long-term loan in March 2017. The related fixed interest swap was paid-off. Currently there is no need for long-term funding as needs for capital investments, changes in operating working capital and dividend payments are typically covered by the operational cash flow supported by current account credit facilities in the various regions.
This refers to risks that originate in our operations which would prevent us from reaching our strategic objectives.
We have therefore appointed an experienced Global Marketing Director in the Executive Management Team who sees to it that we follow a structured approach in new product launches, that we dare to talk about successes and improve the sharing of important market information.
It is of key importance, yet not easy for a company the size and global reach of Holland Colours, to find and successfully on-board new directors. This process does have the full attention of both the Board of Management and the Supervisory Board. We clearly aim to retain long-term employees who know the business and can share the Holland Colours culture with new staff, who, in turn, can introduce new ways of working and new technologies, preferably with the know-how and patience of effective change agents.
The strategy update resulted in a project portfolio of nine global and ten divisional projects, aimed at either sales growth and/or operational excellence. The risk of ineffective execution has been mitigated by installing a Project Management Office (PMO) combined with formal project management training. The project sponsor typically is a member of the divisional or global management team and is responsible for the drafting of the project charter and performance/progress review of the project. The PMO drives the production of regular project updates and sees to it that bottlenecks are addressed and progress reviews are conducted by the relevant management teams.
Risk management is a dynamic process. Risks assessed as minor may change in terms of profile and impact at a later date. New risks that could lead to errors or losses can also not be ruled out. Risk management can therefore not provide absolute certainty or any kind of guarantee with respect to the realization of the company’s objectives.
The Board of Management is of the opinion that:
- The risk management and control systems provide a reasonable degree of certainty that the financial reporting does not contain any material misstatements.
- The risk management and control systems performed satisfactorily in terms of financial reporting during the reporting year.
DECLARATION OF THE BOARD OF MANAGEMENT
With reference to Section 5:25c, paragraph 2, under c, of the Financial Supervision Act, the Board of Management confirms that to the best of its knowledge:
- The financial statements give a true and fair view of the assets, the liabilities, the financial position and the result of the company and the group companies included in the consolidation in accordance with the International Financial Reporting Standards as adopted in the European Union (EU-IFRS) and with Title 9 Book 2 of the Dutch Civil Code.
- The annual report gives a true and fair view of the situation as at the balance sheet date, the state of affairs at the company and its affiliated group companies during the financial year that are included in the consolidated financial statements.
- The annual report describes the principal risks that the company faces.
Apeldoorn, May 30, 2017
Board of Management Holland Colours NV
The company is a combination of high-tech and craftsmanship.
Rob Harmsen, CEO Holland Colours NV