Risk management

Swedol’s business activities are associated with risks in different ways. Well considered risk management can lead to new opportunities, and ultimately create value for Swedol and its stakeholders, while at the same time, risks that are not managed correctly, can lead to damage and losses.l

Meeting the goals set out in the Swedol business plan, can be affected in both the short and long term by strategic, operational and financial risks. To minimize risks and the negative impact of such, Swedol works in line with an established process in accordance with the COSO framework where risks are continuously identified, analyzed, managed and reported within the group.

Strategic risks

Strategic risks can mainly be traced to factors outside Swedol’s own business and concern risks in the form of changes in strategic circumstances.

A Economic cycle risks and external risks

Demand for Swedol products is dependent on growth in the economy and lower growth or external events that affect global trade or other circumstances can impact revenues and profitability negatively.

Risk management
Swedol counters these risks by adapting its business operations to the prevailing demand, pursuing business on several geographic markets and by maintaining good financial stability.

B Structural risks

Swedol is exposed to significant competition. Competitors consist of both local companies within tools and personal protection plus national and international chains oriented to companies or consumers. Added to which, the risk of negative pressure on margins is greater on the large customer market that is characterized by price pressure and customer specific solutions. SMEs generally exhibit greater flexibility in employment during economic upturns and downturns. Technology developments can also change the structure on the market in the form of, for example, competition from companies with new delivery models, changing customer preferences and changed product requirements.

Risk management
Swedol’s risk sensitivity is limited by the group’s sales focus on SME customers. Via an omnichannel concept, Swedol interfaces with its customers based on their needs and preferences. Operational risks Operational risks are mainly risks that lie within the control of Swedol. Supply and range problems plus failings in financial, social and environment related responsibilities are examples of risks in day to day operations.

C Acquisition and integration risk

Acquisitions entail risk both in the actual acquisition transaction and the subsequent integration. In addition to company specific risks, the acquired company’s relationships with key personnel, customers and suppliers can be adversely affected. There is also a risk that integration processes can come to take longer or become more costly than estimated, and the anticipated synergies fail to materialize wholly or in part. Unsuccessful integration
of acquired businesses can come to affect the Swedol brand and earnings negatively. Store integrations within the existing store network can also entail risks for both brands and results. A larger number of smaller acquisitions increase the probability of unsuccessful integrations but reduce their impact, compared to a small number of major acquisitions.

Risk management
Swedol performs careful analyses before implementing any acquisition. In the case of businesses that are integrated into Swedol, both integration costs and synergy effects are closely monitored.

D Risks in sales and operating margin

Swedol’s sales-related risks can concern products in the range not matching demand, having low margins or that the sales channels do not live up to expectations with lower sales and margins as a consequence.

Risk management
Swedol has a broad customer base and is not dependent on a small number of branches or a handful of large customers. Swedol also has a broad product portfolio and a balanced proportion of own label products, which
strengthens the offer and enables higher margins. The group’s sales channels are continuously monitored and developed.

E Risks in the organization

Qualified key personnel along with knowledgeable and enthusiastic employees are an important contributory factor in Swedol’s ability to realize strategies and achieve targets. If Swedol were unsuccessful in ensuring an attractive place to work, this would have a direct negative impact on the company’s ability to attract, engage and retain suitably qualified employees.

F Risks in the goods flow
Swedol works to create a safe, fair and diversified workspace with high job satisfaction and pride amongst employees on an ongoing basis. Plus, important processes for further developing working methods and reducing personnel dependency are documented.

F Risks in the goods flow

Swedol is dependent on goods flows working in a reliable and cost efficient way. The goods flow process starts as early as the purchasing planning stage and failings in the purchasing department can create interruptions in
the goods flow even before the logistics department can distribute the products. An increased share of products from Asia also imposes greater demands on an efficient purchasing process. Were the logistics centers then to be knocked out, the group’s imported products would be noticeably affected for a time, but the business would be able to continue in stores by having products delivered directly by suppliers. The expansion of the logistics center in Örebro entails an increased risk of interruptions in the goods flow. At a time when demands on logistics and inventory capacity are increasing, awareness is also growing with regard to the importance given to environment considerations by businesses in the eyes of customers and other stakeholders.

Risk management
To meeting increased demands on goods flows and inventory capacity, logistics are regularly evaluated and made more efficient. Purchasing work is carefully planned and monitored systematically to reduce the risk of possible interruptions. By combining goods flows, maintaining a high fill rate and prioritizing alternatives to air freight, Swedol strives to reduce the negative climate impact that transport contributes to.

G Risks in inventory

One risk for trading companies that hold large volumes of stock is that inventory can become outdated and have a low stock turnover ratio. With a higher proportion of products from Asia that entail longer shipping times, the greater the risk of a build-up of stock levels that leads to lower turnover
ratios.

Risk management
Swedol works systematically to develop the range and make purchasing and logistics processes more efficient with the aim of increasing the stock turnover ratio and reducing the risk of outdated stock. Careful checks, on site
before the products are shipped, to reduce the risk of outdated products, helps with imports from Asia. The group has developed a core range, to ensure acceptable levels of stock turnover ratios.

H Waste

Swedol risks exposure to waste of different kinds, from deliberate waste such as shoplifting, theft and fraud to administrative waste and a sub optimal use of company resources. Growing e-commerce also leads to the risk of new forms of waste with the risk of orders of fraudulent intent placed by other people or in the name of companies.

Risk management
The group works continuously to improve security in stores to prevent waste in the form of products, money and time. Good internal controls reduce the risk of fraud.

I IT risk

Swedol’s business is dependent on a functioning systems environment and appropriate procedures that are developed in line with the business. Operating interruptions and outages in checkout, e-commerce and logistics and stock management systems, would have a direct impact on operations as it is difficult to switch back to manual processing with the same capacity.

Risk management
Swedol continuously works with activities to limit the number of disturbances in systems and the consequences of such. Via proactive work to identify and reduce possible threats, the risk of unauthorized access and loss of information is reduced.

J Product risks

The ability to meet stakeholder expectations when it comes to quality, transparency, legislative compliance and requirements related to the range is crucial to customer confidence. Group products also need to meet customer
expectations in terms of function, quality, safety and price to avoid the risk of becoming unprofitable.

Risk management
Swedol works continuously to optimize the offer to customers from a quality, price and environment viewpoint. Swedol has adopted the Reach and POP Regulation and the RoHS Directive that stipulates requirements on companies taking responsibility for products and their impact on society in general. The group also applies the precautionary principle when designing products and performs regular product testing to ensure exacting demands are
met on function, quality, safety and chemical content. This means that products and substances can be gradually replaced if necessary. Comprehensive product development and ongoing work on the range ensure that the group has a range that delivers high product quality, safety and customer satisfaction.

K Responsibility in the supplier chain

If Swedol’s suppliers were to prove to be in breach of international rules or deviate from accepted standards, the group risks negative publicity and legal consequences.

Risk management
With the help of amfori BSCI and the Swedol code of conduct for suppliers, the group specifies demands on and evaluates suppliers to ensure that they operate in a responsible way and that risks linked to environment
impact, human rights, corruption and social conditions are minimized.

L Ethical risks

In its guise as a large organization and listed company, Swedol has a responsibility to act in an ethical and exemplary way. Unethical behavior could lead to legal consequences and damage the company’s reputation and trust in it.

Risk management
The group works to a high ethical standard and has a zero tolerance approach to corruption. Swedol requires all employees, business partners and suppliers to act in accordance with its code of conduct. All employees take a course in what the code of conduct contains and entails.

Finance-related risks

Finance-related risks can mainly be traced to factors outside Swedol’s own business and concern risks in the form of changes in financial circumstances.

M Wage inflation in manufacturing countries

Swedol is affected by changes in wage levels in those countries where group products are manufactured. This can vary between different products depending on what proportion of the manufacturing process is labor related.

Risk management
Swedol actively works to find solutions that improve the gross margin of the product range. This can, for example, mean that production of the group’s own label products is moved to other countries if the pay situation in a manufacturing country leads to poorer margins on the range.

N Commodity prices

Purchase prices of group products are affected by factors such as the world market price for individual commodities. This applies especially to electrical materials (copper), batteries (zinc), lighting (aluminum), plastic products (oil) and clothing (cotton). The group does not hedge the price risk of underlying commodities. This entails a risk as the purchase price of the products concerned is affected by commodity price changes while the sales price is dictated by the market for the respective product.

Risk management
Swedol strives to neutralize the negative impact of costs from the commodities market, including by price adjusting changes in commodity prices.

O Liquidity risk

Liquidity risk means that the group finds itself in a situation where it lacks liquid assets to cover the payment of undertakings.

Risk management
Swedol’s liquidity reserve should cover 100 percent of estimated net investments for the coming six months and 100 percent of operating capital requirements for the coming three months. Credit facilities ought to have a remaining agreement period of at least 12 months.

P Interest rate risk

At the end of 2018, interest bearing net liabilities amounted to MSEK 311.1. Based on the size of these interest bearing net liabilities at the end of the year, a change in the interest rate level of e.g. 0.5 percentage points would affect profit after tax for the year by +/- MSEK 1.3.

Risk management
Swedol aims to use surplus liquidity for the repayment of loans, in the first instance. Historically, Swedol has had a relatively low proportion of interest bearing liabilities.

Q Currency risk

Swedol is exposed to currency fluctuations via sales in NOK and EUR and a more extensive exposure via purchasing made in Asia and Europe. Swedol’s main net currency exposure is to the USD and EUR.

Risk management
To manage currency exposure when purchasing in USD and EUR, forward hedging or similar derivatives are used to partly reduce the impact of possible currency fluctuations on a rolling 12-month basis in accordance with our finance policy.

R Write down of intangible assets

Acquisition related goodwill forms a significant part of the group balance sheet. Write down costs related to goodwill and other intangible assets. can have a negative impact on the group’s financial position and earnings.