Uncertainty about future developments and the course of events is a natural risk for any business. Risk-taking in itself provides opportunities for continued economic growth, but naturally the risks may also have a negative effect on business operations and the goals set for them. It is therefore essential to have a systematic and efficient risk assessment process and an effective risk management program in general. The purpose of risk management at ASSA ABLOY is not to avoid risks, but to take a controlled approach to identifying, handling and minimizing the effects of these risks. This work is based on an assessment of the probability of the risks and their potential effect on the Group.
ASSA ABLOY is an international group with a wide geographical spread, which involves it in exposure to various forms of strategic, operational and financial risks. Strategic risks refer to changes in the business environment with potentially significant effects on ASSA ABLOY’s operations and business objectives. Operational risks comprise risks directly attributable to business operations, entailing a potential effect on the Group’s earnings and financial position. Financial risks mainly comprise financing risk, currency risk, interest rate risk, credit risk and risk associated with the Group’s pension obligations.
ASSA ABLOY’s Board of Directors has ultimate responsibility for risk management within the Group and determines the Group’s strategic focus based on recommendations from the Executive Team. In the decentralized spirit that characterizes ASSA ABLOY, and to keep risk analysis and risk management as close as possible to the actual risks, a large proportion of operational risk management takes place at division and business-unit level.
Strategic risks
The main risks of this nature that ASSA ABLOY encounters include various forms of risks from the surrounding world that may have an impact on the security market in general, mainly changes in customer behavior, competitors, brand positioning and environmental risks. In addition, there are country-specific risks.
ASSA ABLOY has worldwide market penetration, with sales and production in a large number of countries. The emphasis is on Western Europe and North America, but the proportion of sales in Asia and in Central and Eastern Europe has increased in recent years. For natural reasons, therefore, the Group is exposed to both general risks from the world at large and country-specific risks such as political decisions, comprehensive changes in the regulatory framework, etc. Changes in customer behavior in general, as well as the actions of competitors, affect demand for different products and their profitability.
Customers and suppliers, including the Group’s relationships with them, are subject to continuous local review. For some time the Group has had a central business intelligence organization that primarily focuses on industry-specific factors. In 2008 measures were taken to further strengthen this organization, for example by spreading pertinent information to the Group’s various business units. As regards competitors, risk analyses are carried out both centrally and locally.
The Group owns several of the strongest brands in the industry, including several global brands that form a good complement to the Group’s master brand ASSA ABLOY. The local product brands are increasingly being linked to the master brand. Generally speaking, ASSA ABLOY’s good reputation is one of the Group’s strengths and serves as a foundation for market leadership.
Activities aimed at maintaining and further strengthening ASSA ABLOY’s good reputation are continually in hand. One aspect is to ensure compliance with ASSA ABLOY’s Code of Conduct. The Code of Conduct previously implemented in the Group was reviewed and updated in 2008. The Code expresses the Group’s high aspirations relating to social responsibility, commitment and respect for the environment. A more detailed description of the Code can be found in the Sustainable development report..
Operational risks
Operational risks comprise risks directly attributable to business operations and with a potential effect on the Group’s earnings and financial position. Operational risks include legal risks, acquisition of new businesses, restructuring measures, availability and price fluctuations of raw materials, customer dependence, and more. Risks relating to compliance with laws and regulations and to financial reporting and internal controls also fall into this category.
The table below describes in greater detail how these risks are handled.
| Operational risks |
Risk management |
Comments |
|---|---|---|
| Legal risks |
The Group continuously monitors anticipated and implemented changes in legislation in the countries in which it operates. A Group-wide legal policy specifies the legal framework within which business operations may be conducted. Ongoing and potential disputes and other legal matters are reported regularly to the Group’s central legal function. ASSA ABLOY has implemented guidelines on compliance with current competition legislation. Legal risks associated with property and liability issues are continually evaluated together with insurance company representatives. |
It was judged at the end of 2008 that there are no outstanding legal disputes that are expected to lead to significant costs for the Group. |
| Acquisition of new businesses |
Acquisitions are carried out by a group of people with considerable experience of acquisitions and with the support of, for example, legal and financial consultants. Acquisitions are carried out according to a uniform and predefined Group-wide process. This consists of four documented phases: strategy, evaluation, implementation and integration. |
The Group’s 2008 acquisitions are presented in the Report of the Board of Directors and in Note 31, Acquisitions. |
| Restructuring measures The Group is implementing specific restructuring programs which involve some production units changing focus mainly to final assembly, while certain units are closing. |
The restructuring programs are being run as a series of projects with set activities and schedules. The various projects are systematically followed up on a regular basis. |
The scope, costs and savings of the restructuring programs are presented in greater detail in the Report of the Board of Directors. |
| Price fluctuations and access to raw materials |
Raw materials are purchased and handled primarily at division and business-unit level. Regional committees coordinate these activities with the help of senior coordinators for selected material components. |
For more information about procurement of materials, see Note 7. |
| Customer losses |
Accounts receivable are spread among a large number of customers in many markets. Credit risks are handled locally at company level and reviewed at division level. |
Receivables for each customer are relatively small in relation to total accounts receivable. The risk of significant credit losses for the Group is considered to be limited. |
| Insurance risks |
ASSA ABLOY has set up a Group-wide insurance program mainly relating to property, interruption of operations, and liability risks. The insurance program covers all business units. The Group’s exposure in the risk areas listed above is regulated by measures such as its own insurance company. |
The Group’s insurance coverage is considered to be generally adequate, providing a reasonable balance between assessed risk exposure and insurance costs. |
| Risks related to internal control |
The organization is considered to be relatively transparent, with a clear allocation of responsibilities. Instructions about the allocation of responsibilities and authority and other internal control procedures are laid down in an internal control manual. Compliance with the manual is evaluated annually through self assessment. |
Internal control and other related issues are reported in greater detail in the Corporate governance report. |
| Risks relating to financial reporting |
A well-established Controller organization at both division and Group level analyzes and monitors financial reporting quality. A comprehensive systematic risk assessment of financial reporting was carried out in 2008. |
Also see the section ’Basis of preparation’ in Note 1. More information about risk management relating to financial reporting can be found in the Corporate governance report. |
Financial risks
Group Treasury at ASSA ABLOY is responsible for the Group’s short- and long-term financing, financial cash management, currency risk and other financial risk management. Financial operations are centralized in a Treasury function that handles most financial operations as well as financial risks with a Group-wide focus. Group Treasury moved during the year from Geneva to headquarters in Stockholm in order to further optimize its work on financial risks within the company.
A financial policy that is updated annually and approved by the Board regulates the distribution of responsibilities and control of the Group’s financing activities. Group Treasury has the main responsibility for financial risks within the framework established in the financial policy. In this work a large number of financial instruments is used. Accounting principles, risk management and risk exposure are described in greater detail in Note 1 and Note 22, as well as Note 26 for pension obligations.
The Group’s financial risks mainly comprise financing risk, currency risk, interest rate risk, credit risk and risks associated with the Group’s pension obligations.
Financing risk refers to the risk that financing the Group’s capital requirements and refinancing of outstanding loans becomes more difficult or more expensive. Financing risk can be reduced by maintaining an even maturity profile for loans and by maintaining a high credit rating. The risk is further reduced by substantial unused confirmed credit facilities.
Since ASSA ABLOY sells its products in countries worldwide and has companies in over 60 countries, the Group is exposed to the effects of exchange rate fluctuations. Such changes affect Group earnings both when foreign subsidiaries’ income statements are translated to Swedish kronor (translation exposure) and when products are exported and sold in countries outside the country of production (transaction exposure). Translation exposure is primarily related to earnings in USD and EUR. This type of exposure is not hedged. Currency risk in the form of transaction exposure, or the relative values of exports and imports of goods, is fairly limited in the Group, though it is expected to increase over time due to efficiency measures in production and purchasing. In 2008 the Group handled transaction exposure by hedging expected cash flows in tradable currencies for the next financial year. Hedging was done through derivatives, primarily through a currency basket. For 2009 the Group has revised its policy and the underlying principle is to allow currency fluctuations to have an impact on the business as quickly as possible. As a result of this strategy, only limited portions of current currency flows are usually hedged.
Exchange rate changes also affect the Group’s liabilities and equity. The difference between the assets and liabilities of foreign subsidiaries in the respective foreign currency is affected by exchange rate changes and causes a translation difference that affects the Group’s equity. A general weakening of the Swedish krona leads to an increase in net debt, but at the same time increases Group equity. At year-end the largest foreign net assets were denominated in USD and EUR.
With respect to interest rate risks, interest rate fluctuations have a direct impact on ASSA ABLOY’s net interest expense. The net interest expense is also impacted by the size of the Group’s net debt and its currency composition. Net debt was SEK 14,013 M (12,953) at the end of 2008 and was mainly denominated in SEK, USD and EUR. Group Treasury analyzes the Group’s interest rate exposure and calculates the impact on income of defined interest rate shifts on a rolling 12-month basis. In addition to raising fixed-rate and floating-rate loans, various interest rate derivatives are used to adjust interest rate sensitivity. At year-end, the average interest rate duration, excluding pension obligations, was about 23 (25) months.
Credit risk arises both within ordinary business operations and through the financial transactions carried out by Treasury. Accounts receivable are spread across a large number of customers from different territories, which reduces the credit risk. Credit risks related to operational business activities are handled locally at company level and reviewed at division level.
Financial risk management exposes ASSA ABLOY to certain counterparty risks. Such exposure may arise, for example, from the placement of surplus cash, from borrowing and from derivative financial instruments. Counterparty limits are set for each financial counterparty and continually reviewed.
At the end of 2008 ASSA ABLOY had obligations for pensions and other post-employment benefits of SEK 3,963 M (4,384). The Group manages pension assets valued at SEK 2,604 M (3,177). Pension provisions in the balance sheet amount to SEK 1,182 M (1,156). Changes in the value of assets and liabilities from year to year are due in part to trends on the debt capital markets and equity markets and in part to the actuarial assumptions made. Such assumptions involve factors such as discount rates, as well as anticipated inflation and salary increases.
