Systemair's business involves risks that to a varying extent may adversely affect the Group. These may be divided into operation-related risks, such as the market risk in the cyclical construction industry and changes in the competitive situation, and financial risks, chiefly currency exposure. Both operation-related and financial risks may in the short and the long term affect Systemair’s ability to achieve its set objectives according to the Company’s business plan. Systemair works continuously on keeping abreast of the Group’s risk situation via a documented, systematic process at Board level, in which risks are identified, assessed, monitored and reported. Priority is given to the risks that are judged to represent the greatest negative effect, on the basis of the probability of their occurring and the possible impact on the business.
The table below illustrates the hypothetical effects of changes in certain factors on Systemair's 2015/16 operating profit. The calculations below are hypothetical and should not be interpreted as indicating that changes in certain factors are any more or less likely or, if any change takes place, the extent of such change. Actual changes and their effect may be greater or lesser than indicated in the table. Further, it is likely that actual changes will affect several items. Thus, caution is called for when interpreting the sensitivity analysis in those changes in various items may have a counteractive effect.
Sensitivity analysis: effects on operating profit in 2016/17
±5% in selling prices
±5% in material costs
±5% in selling and administration expenses
±5% in the SEK/EUR exchange rate
±5% in the SEK/NOK exchange rate
±5% in the SEK/RUB exchange rate
±5% in the SEK/USD exchange rate
The table shows that a change of +/-5 percent in the SEK/EUR exchange rate would have an impact of approximately SEK 21 million (21) on operating profit for 2016/17. This effect is largely offset by the effects on net financial items of exchange gains and losses on borrowing denominated in EUR.
Systemair’s markets are fragmented and exposed to competition; a large number of small, local businesses and a small number of major international corporations operate in Systemair’s markets. Some of Systemair’s current or future competitors may have greater resources than Systemair and may apply such resources to expand their market shares through aggressive pricing strategies. This could force Systemair to reduce its prices to remain competitive and not lose market shares. If Systemair is exposed to increased price competition or loses market shares, the Company’s operations, earnings and financial position may be adversely affected. The ventilation sector still consists largely of a number of relatively local operators. Should rapid international consolidation take place in the ventilation sector, and should Systemair not be part of that consolidation, there is a risk of exclusion from the market. Systemair has addressed that risk by establishing factories in low-cost countries such as India and Lithuania and by establishing new sales companies in new markets.
Systemair’s products are used in new construction as well as in renovations, conversions and additions (Swedish acronym: ROT). The construction industry normally follows a cyclical pattern, above all in new construction, while ROT projects often smooth the cyclical effect. Developments in the industry are largely influenced by the state of the economy in general, which in turn is affected by interest rates, unemployment, inflation, political decisions, taxes, stock market trends and other factors. Changes in circumstances for the construction industry may be difficult to foresee, and a slowdown in the industry in Systemair’s markets could reduce demand for the Company’s products and/or lead to lower prices for the Company’s products, which could adversely affect Systemair’s operations, earnings and financial position. Systemair’s sales are also vulnerable to seasonal fluctuations, with sales mostly being lower during July and December.
Ziehl-Abegg and ebm-papst, two German manufacturers of fan motors, are major suppliers to Systemair. Some of Systemair’s products have been developed in association with these suppliers and to some extent Systemair depends on the ability of these manufacturers to continue supplying motors to the Company. Thus, supply problems at either of these companies could disrupt Systemair’s production and have a negative impact on Systemair’s operations, earnings and financial position. Another important component in Systemair’s products is steel, in the form of steel plate, so the Company’s operations to a certain extent are affected by fluctuations in the price of steel, and by any disruptions in steel deliveries. Historically, it has been possible to spread price increases across multiple actors, but there is no guarantee that this will continue to be possible. If future price increases cannot be distributed among actors in the market, Systemair’s operations, earnings and financial position may be adversely affected.
Systemair's brands are vital to the Company's operations. Systemair's major brands include Systemair, Frico, Fantech, Holland Heating and Menerga. Systemair assesses the brand situation on an ongoing basis and registers each brand in the countries where they are used to any significant extent. However, the Company cannot guarantee that these measures are sufficient to protect Systemair’s brands. Neither can Systemair guarantee that the Company’s competitors will not try to use its brands in the marketing of their products or otherwise infringe its intellectual property rights. If the Company’s brands cannot be protected, for whatever reason, the Company’s operations, earnings and financial position may be adversely affected.
Production plant and distribution centres
Systemair’s operations are dependent on its production plant and distribution centres. If any of them is destroyed or closed or if the equipment at the plant suffers serious damage, the production and distribution of Systemair’s products could be disrupted or suspended for some period. An extensive and prolonged shutdown could have a huge impact on the Company’s ability to produce or distribute the products affected. Systemair has purchased insurance against property damage and stoppages in an amount the Company deems sufficient; however, there is no guarantee that the entire loss for the Company would be indemnified in the event of any damage. As a result, damage to production or distribution facilities may adversely affect the Company’s operations, earnings and financial position.
For several years running, Systemair has completed a considerable number of business combinations. The companies acquired have been integrated into Systemair’s other operations. In many cases, the companies acquired had operational and financial problems, which required substantial efforts on the part of Systemair, not least in the form of management resources. Expansion through acquisition remains an ambition of Systemair’s, and in the future more companies that complement or augment the Company’s operations may be acquired. The acquisition of companies may involve many different operational and financial risks. Along with well- or lesser-known company-specific risks, these risks include the possible departure of suppliers, customers or key personnel from the company acquired. In addition, the integration of companies acquired may turn out to be more costly or time-consuming than expected and the anticipated synergistic benefits may not be achieved as expected or at all. These and other acquisition-related risks may adversely affect the Company’s operations, earnings and financial position.
Systemair has a highly developed IT infrastructure, the core of which is the Company’s enterprise resource planning (ERP) system. The ERP system is vital to Systemair’s ability to deliver products to its customers at the time appointed and to manage trade accounts receivable and inventory levels. Problems in maintaining, upgrading and integrating these systems may adversely affect the Company’s reputation among its customers, increase operating costs and reduce profitability. These systems are also vulnerable to power outages, system errors, computer viruses, network faults and other risks. In the event of a breakdown in the IT infrastructure, the Company’s operations, earnings and financial position may be adversely affected.
Systemair’s customers normally expect detailed performance data on their ventilation products. Thus Systemair provides detailed product specifications in its marketing and sales activities and the Company conducts continuous tests in its own test facilities to ensure that its products meet their specifications. However, the possibility cannot be ruled out that a product the Company has sold may not live up to its specifications, which may result in claims against the Company. Further, the Company is subject to legal regulations on product liability that, in the event of personal injury or damage to property, may entitle the injured party to compensation from the Company. The Company has taken out global product liability insurance that, in the Company’s view, is sufficient to cover any claim for damages. However, this cannot be guaranteed. If a claim for compensation against the Company is upheld and the claim is not covered by the Company’s insurance, the Company’s operations, earnings and financial position may be adversely affected.
International business operations
Systemair conducts, via subsidiaries or representative offices, its own operations in 49 countries, some of which are in the process of rapid development and transformation into market economies. As a result, the Company is exposed to risks associated with international business operations, such as trade policy decisions in the form of the introduction or extension of excise duties in the Company's markets, which could significantly and adversely affect the Company's operations. Other risks include differences in the regulatory frameworks of different countries, limited legal protection for intellectual property rights in certain countries, different accounting standards and systems of taxation, different terms and conditions of payment between different countries and the possibility of political instability. Systemair has substantial sales to Russia, for example, one of Systemair's single largest export markets. Political tensions in the development of that society and uncertainty in its legal system, as well as uncertainty in trade policy, mean that conditions in the Russian market could change quickly and that Systemair's assets in the country could become uncertain. Each of the abovementioned risks could adversely affect Systemair’s operations, earnings and financial position.
The Systemair Group is exposed to financial risks through its international operations and its borrowing. Financial risk arises when interest and exchange rates fluctuate, which causes variations in the Group’s cash flows, and when credit lines are to be renegotiated. Financial risk includes the risk of a counterparty failing to meet their obligations. The objective of risk management in the Group is to limit any possible adverse impact on the Group’s earnings and cash flow. Risk is monitored and followed up on an ongoing basis by the Group treasury as well as by the major subsidiaries.
Foreign exchange risk – transaction exposure
In trading between Group companies and with suppliers and customers, a transaction risk arises if payment is made in a currency other than the local currency of the particular Group Company.
Systemair’s extensive international operations represent substantial sales in various currencies and thus exposure to foreign exchange risk. This risk arises primarily vis-à-vis the EUR and USD and is partly hedged as per Systemair’s foreign exchange policy. Systemair does not use hedge accounting.
In 2015/16, Group companies in Sweden invoiced 41 percent (39) of their business in SEK, 49 percent (52) in EUR, 4 percent (6) in NOK and 6 percent (4) in other currencies.
Each year, an estimate is made of the future net inflow of EUR, 50 percent of which is usually hedged. Forward contracts extend for a maximum of 18 months ahead. On the balance sheet date, the Group had forward foreign exchange contracts in EUR/SEK.
Foreign exchange risk – translation exposure
Translation exposure arises upon consolidation, when the assets and liabilities of foreign subsidiaries are translated to SEK. Systemair applies the current method, in which assets, liabilities and equity are translated at the exchange rates prevailing at the balance sheet date, while the income statements are translated at average rates for the year. Any exchange differences resulting from the use of this method are recognised directly in Other comprehensive income. Systemair has adopted the policy of hedging part of this translation exposure. This may result in exchange rate differences that affect the Group's equity.
On the balance sheet date, the value of foreign net assets totalled SEK 1,380 million (1,323). Major net assets consist of SEK 727 million (713) in EUR, SEK 108 million (111) in DKK, SEK 98 million (86) in NOK, SEK 98 million (85) in RUB, SEK 71 million (79) in TRY, SEK 67 million (61) in CAD and SEK 59 million (64) in INR.
The impact of foreign exchange on equity is recognised as a translation difference and amounted to SEK -85.4 million (68.9).
Borrowing and interest rate risk
Systemair intends to continue to finance some portion of its operations by borrowing from credit institutions. Loan agreements include conditions consisting of standard restrictions, or covenants. This borrowing represents certain risks to the Company’s shareholders. For example, if conditions change significantly in the Company’s markets, Systemair may have difficulty securing new credit facilities and so may need to use a larger portion of its cash flow for interest payments and amortisation.
The interest rate risk is the risk of changes in current interest rates adversely affecting the Group. Systemair is a net borrower. Net indebtedness at year-end totalled SEK 1,387.4 million (1,282.1), with the result that the Group is adversely affected by rising interest rates. Interest-bearing liabilities on the balance sheet date, translated to Swedish kronor, totalled SEK 1,505.7 million (1,385.7). According to Systemair's financial policy, the fixed-interest term for 2015/16 is to be 3-12 months. A change of +/-1 percentage point in the borrowing interest rate would have an impact of about SEK 15 million (14) on the Group's net financial items for the following 12-month period.
Credit and liquidity risk
Credit risk is the risk that one of Systemair’s counterparties may be unable to meet their payment obligations and thus may cause a loss for the Company. A credit appraisal is made based on knowledge the Company’s management has of the customer and, if necessary, with the aid of credit rating companies. Every customer also has a credit limit, which may only be exceeded if a new credit appraisal is made. Liquidity risk is the risk that a lack of ready funds will prevent the Company from fulfilling its financial obligations or will reduce its capacity to conduct its operations in an effective manner. Liquidity is greatly affected by credit to customers and credit from suppliers. As Systemair’s operations have expanded in new markets with different payment customs, the credit periods have lengthened somewhat. This has increased the cost of tied-up capital as well as the risk of credit losses and consequently the risk of negative effects on the Company’s ready cash and earnings.