RISK MANAGEMENT

 

The risk appetite of Holland Colours is best reflected in our strategic ambition. Our main focus is to defend our global market share in colorant market segments 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 partnerships.

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 strategy is well focused, stays close to 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 in bridging 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’ behavior.

Our divisions are responsible, in close cooperation with the central functions, for maintaining an effective risk and control environment as part of day-to-day operations.
The 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 2017/2018 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 our most recent integral risk management session with senior managers to re-assess the potential risks to our company’s future, culture, strategy and chosen CSR values. We set a 5-year horizon for this process. During 2017/2018, we performed regular reviews with the Executive Management Team on updates and changes for the key risks identified from the session in 2017. On top of that, we paid additional attention to cybersecurity as well as adherence to laws and regulations on data protection.

Cybersecurity threats have become part of day-to-day life, including for Holland Colours. In the past year, we have intensified our focus with help from our 3rd party IT partners. We performed several risk assessments and made adjustments at both the technical and organizational levels.

We are combining this topic with the requirements under the new GDPR act, to be adhered to as of May 2018. A recent readiness audit (performed by BDO for NL, UK and Hungary) did not reveal major issues but did identify opportunities for improvement in the areas of data processing, document retention and the need to update the general know-how of key staff on the new rules. Measures have been identified and will be implemented in time.

The remainder of this paragraph will summarize the risks as identified per key category:

  • Strategic
  • Compliance
  • Financial
  • Operational

Strategic
These risks refer to elements or trends that could hinder us in achieving our long-term strategic objective.

Our ability to defend and grow market share in B&C and Packaging depends on our ability to follow changes in market requirements and legislation
Changes in market requirements are ongoing both from an equipment point of view (faster, more standardization) as well as product compliance point of view (recycling, environmental legislation, REACH, FDA, NIAS). The risk is that Holland Colours is (or is perceived as being) too small to manage 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 long-term relationship with Gaypa from Italy). In our strategy 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. The recent hire of the Director Innovation and Technology is an important step as well.

Competitive behavior and market consolidation trends expose us to new challenges
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 presents both challenges and opportunities for smaller players such as Holland Colours that have a global reach serving niche markets from a Caregiver approach. Additionally, apart from North America, we still see only limited concentration trends in 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. As these trends are of a global nature, we manage this segment of our business on a global basis where it relates to strategy and product development. Lastly, we are experiencing the impact of supplier consolidation, which drives up the cost of our raw materials. In some cases, we are able to reformulate our products while in other cases (for example, for Tio2) we have to offset the cost increase through higher sales prices.

Our ability to act as a global partner providing local service depends on our business model
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 thinly while at the same time being unable to reach local markets. We believe that with the different go-to-market models we are spreading 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 various 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 2016/2017 year, for example, we made the decision to close our wholly-owned China entity and continue with local business partners.

Compliance
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. In the Packaging segment, we are subject to audits and reviews by our customers who certainly help to keep us well connected and aligned. Please refer to the Corporate Social Responsibility section for information on the measures in place to safeguard a safe working environment for our employees and actions in place to ensure our raw materials are sourced from respectable companies that adhere to good business practices.

At Holland Colours we take food contact very seriously
From a preventive perspective, 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 that we are valued for our active approach to find solutions. This is done by 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 self-imposed audit system).

We also have a structured approach to learning from any incidents that occur. The complaints registration and handling system has been given outstanding scores 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 complaints 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.

Financial
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 section 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 as well.

Operational
This refers to risks that originate in our operations which would prevent us from achieving our strategic objectives.

Effective scale-up and launch of new products is seen as a critical success factor at Holland Colours
We have incorporated the scale-up phase as an integral part of projects that relate to new product development. All global projects are reviewed at the Executive Management Team level on a regular basis, as part of which potential issues, including those relating to the scale-up phase, are flagged and discussed. The preparation for market launch is now carried out under the direct supervision of the Director Global Marketing during the final phase of the product development project. Coordination between the project leader and Director Global Marketing already commences in the phase of test marketing.

Succession planning is an issue that Holland Colours needs to address in a systematic way
It is of key importance, yet not easy for a company of the size and global reach of Holland Colours, to find and successfully on-board new directors. This process has 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.

Holland Colours strongly believes that proper project management is a key driver for success
As part of the strategy a project portfolio of global and divisional projects was created, aimed at 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 Executive 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 ensures that bottlenecks are addressed and progress reviews are conducted by the relevant management teams.


CONCLUSION

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 assurance or any kind of guarantee with respect to the achievement 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 assurance that the financial reporting is free from material misstatements.
  • The risk management and control systems functioned 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 31, 2018

Board of Management Holland Colours NV
Rob Harmsen
Margret Kleinsman

quote robThe company is a combination of high-tech and craftsmanship.



Coen Vinke, CEO Holland Colours NV