Risk and analysis

Business operations are always associated with risk. Addtech’s profit and financial position, as well as its strategic position, are affected by various internal factors within Addtech’s control and a number of external factors where opportunities to affect the course of events are limited. Effective risk assessment unites Addtech’s business opportunities and performance with the demands of shareholders and other stakeholders for stable long term value growth and control. When assessing the future development of Addtech it is therefore important to consider not only the opportunities for positive development, but also the various risks in the operations. Naturally, not all risk factors can be described in this section, for which reason an overall assessment must also include other information in the annual report, as well as a general assessment of external circumstances.

Addtech works with risk management on both a strategic and operational level. Risk management involves identifying and measuring risks and preventing them from occurring, as well as continually making improvements to mitigate future risks. The Addtech Group has guidelines and policies to identify deviations that could develop into risks. The level of risk in the operations is followed up systematically at Board meetings and in monthly reports, in which deviations or risks are identified and remedied. The risk factors of greatest significance to Addtech are the economic situation, or other events affecting the economy, such as the worldwide COVID-19 pandemic, in combination with structural changes and the competitive situation. Addtech is also affected by financial risks, such as transaction exposure, translation exposure, financing and interest rate risk, as well as credit and counterparty risk.

See Note 3 in the annual report 2020/2021 for a more detailed description of how Addtech manages financial risks.

Addtech’s continued success is strongly dependent on our good reputation and business ethics. Human rights violations in the Group’s own operations or those of its suppliers would have a negative impact on the Group’s reputation among employees, customers and other stakeholders and influence demand for the Group’s products.

Internally, the Group works with business ethics through initiatives including the Business School and it is clearly communicated in our internal Code of Conduct. Compliance with anti-corruption and human rights regulations is reviewed annually. Addtech’s many favourable relationships with carefully selected suppliers reduce the risk of human rights violations occurring among our suppliers. To ensure that the Group’s high standards in terms of business ethics are maintained, all suppliers are also required to observe Addtech’s Code of Conduct for Suppliers and specific supplier audits are conducted.

 

Historically, Addtech has, for the most part, grown through acquisitions. Strategic acquisitions will continue to represent an important part of our growth. However, there is a risk that Addtech will not be able to identify suitable objects for acquisition due, for example, to competition with other buyers. Expenses attributable to acquisitions may also be higher than expected, and positive impacts on earnings may take longer to realise than expected. The risk of goodwill impairment arises when a business unit underperforms in relation to the assumptions that applied at the time of valuation, and any impairment may adversely affect the Group’s financial position and earnings. Further risks associated with acquisitions include integration risks and exposure to unknown commitments.

Addtech has many years of solid experience in acquiring and pricing companies. All potential acquisition targets and their operations are examined carefully before implementing the acquisition. There are well-established procedures and structures for pricing and implementing the acquisition, as well as for integrating the acquired companies. In the agreements, an effort is made to obtain the necessary guarantees limiting the risk of unknown liabilities. The large number of companies acquired entails a significant distribution of risk.

 

Demand for Addtech’s products and services is greatly influenced by macroeconomic factors beyond Addtech’s control, such as growth and investment appetite in the manufacturing industry, the state of the economy in general and conditions in the global capital market or, as during 2020/2021, outbreaks of pandemics affecting the business climate. A weakening of these factors in the markets in which Addtech operates could have adverse effects on its financial position and earnings.

With a large number of subsidiaries focusing on different niche markets and add-on sales of technical service, support and consumables, Addtech may be less sensitive to economic fluctuations in individual industries, sectors and geographical regions. Addtech also strives continuously to develop businesses that are less dependent on a specific market and to align expenses with specific conditions.

Globalisation, digitalisation and rapid technological development drive structural change among customers. Developments may increase demand for Addtech’s advanced services but can also result in Addtech’s customers disappearing through mergers, closures and relocations, to low-cost countries for example.

Addtech’s clear and unique added value services with their high technology content, specialisation in advanced technical advisory services, outstanding service and strong presence in niche markets offset price competition. Addtech’s competitiveness also enables the Company to deliver beyond its immediate geographical region. Combined with the fact that no customer accounts for more than approx 4 percent of consolidated sales, the Group’s exposure to a large number of sectors constitutes a certain degree of protection against adverse impacts on earnings.

Most of Addtech’s subsidiaries operate in sectors that are vulnerable to competition. In addition, consolidation may occur among suppliers in the sector, and larger merged suppliers may have a broader offering, which could result in pressure on prices. Future competitive opportunities for the subsidiaries will depend on their ability to be at the leading edge of technology and to respond quickly to new market needs. Increased competition or a decline in the ability of a subsidiary to meet new market needs could have a negative impact on Addtech’s financial position and earnings.

Addtech strives to offer products and services for which price is not the sole deciding factor. By working closely with both suppliers and customers, we are continuously developing our know-how and competitiveness. We add value in the form of wide-ranging technological knowledge, reliability of delivery, service and availability, limiting the risk of customers decreasing their demand. To reduce the risk of competition from suppliers, Addtech focuses continuously on ensuring that collaboration with the Group is the most profitable sales strategy

Changed environmental legislation could affect product sales, goods transports and the way in which our customers use the products. An inability to meet customers’ increased environmental requirements can affect sales. There is also a risk that the corporate ID number of a Group subsidiary could entail a historical liability for the company under the Swedish Environmental Code.

Addtech’s subsidiaries are primarily engaged in commerce and operations with limited direct environmental impact. The Group conducts limited production. The Group monitors operations and environmental risks through its sustainability reporting and all companies comply with the Group’s Code of Conduct. In conjunction with acquisitions, Addtech conducts an analysis of the potential target’s corporate ID number to counter the risk of being held liable for historical environmental issues.

Climate change entails both transitional risks and physical risks that can have a negative impact on Addtech and its subsidiaries. Relevant transition risks are higher taxes on carbon dioxide-intensive products and services, revolutionary changes in the market and increased raw material prices. Relevant physical risks are increased operating and capital costs, as a result of more frequent damage to our operations caused by the effects of climate change, such as more extreme weather.

For Addtech, the management of climate-related risks is an important parameter for future business development, and we have carried out scenario analyses to identify financial risks linked to climate change. Risks linked to climate change are part of our analysis of potential acquisitions. The Group works to integrate climate risks into major investments.

Addtech’s decentralised organisation is based on subsidiaries bearing extensive local responsibility for their operations. This imposes high standards on financial reporting and monitoring, with shortcomings in this regard potentially leading to inadequate control of the operations.

Addtech controls its subsidiaries through active board participation, Group-wide policies, financial targets and instructions regarding financial reporting. By being an active owner and monitoring the development of the subsidiaries, risks can quickly be identified and addressed in accordance with the Group’s internal guidelines.

Addtech’s continued success depends on being able to retain experienced employees with specific skills and to recruit skilled new people. There are a number of key individuals, both among senior executives and among the Group’s employees in general. There is a risk that one or several senior executives or other key individuals could leave the Group at short notice, for reasons of stress, working environment or development opportunities, for example. In the event that Addtech fails to recruit suitable replacements, or to find skilled new key individuals in the future, this could have a negative impact on Addtech’s financial position and earnings.

Addtech prioritises building favourable conditions for employees to develop within the Group and to enjoy their work. The Group’s acquisition strategy includes ensuring that key individuals in the companies are highly motivated to continue running their companies independently within the Group. The Addtech Business School is aimed at both new employees and senior executives and serves to increase internal knowledge transfer, promote personal development among employees and develop the corporate culture. The Group’s regular employee surveys serve to ascertain how employees view their employers and their work situation, and what might be improved and developed.

The Group is exposed to various financial risks. Currency risk is the risk of exchange rates having an adverse impact on Addtech’s financial position and earnings. Transaction exposure is the risk that arises because the Group has incoming and outgoing payments based on payment flows in foreign currencies. Translation exposure arises because the Group, through its subsidiaries, has net investments in foreign currencies. The Group is also exposed to financial risk, that is, the risk that financing of the Group’s capital requirements is made more difficult or expensive. Interest rate risk is the risk that unfavourable changes in interest rates have an adverse impact on Addtech’s financial position and earnings.

Addtech strives for structured and efficient management of the financial risks that arise in its operations, in accordance with the financial policy adopted by the Board of Directors. The financial policy expresses the ambition of identifying, minimising and controlling financial risks, and establishes responsibility for managing how such risks are to be delegated within the organisation. The aim is to minimise the impact of financial risks on earnings. See Note 3 for a more detailed description of how Addtech manages financial risks.

 

To deliver products, Addtech is dependent on the ability of external suppliers to fulfil agreements in terms of volume, quality, delivery date, etc. Deliveries that are erroneous or delayed, or that do not occur, may have an adverse impact on Addtech’s financial position and earnings. Addtech’s reputation is also dependent on its suppliers’ ability to maintain a high level of business ethics, in terms of, for example, human rights, working conditions and the environment. Agreements with customers vary, for example in terms of contract length, warranties and limitations of liability. In some supplier relationships there are no written supplier agreements, which could result in legal uncertainty regarding the content of the agreement.

Addtech’s numerous and favourable relationships with carefully selected suppliers reduce the risk of Addtech not being able to deliver as promised. To ensure that the Group’s high standards in terms of business ethics are maintained, all suppliers are also required to observe Addtech’s Code of Conduct for Suppliers. Most of the companies also perform specific supplier reviews. In a longer-term perspective, Addtech is not dependent on any individual supplier or customer. Addtech’s largest customer accounts for about 4 percent of consolidated net sales.

 

Throughout society, the digital risks are continuously rising. Like most companies, Addtech and its subsidiaries rely on various information systems and other technologies to manage and develop their operations. Unplanned outages and cyber security incidents, such as data breaches, viruses, sabotage and other cybercrimes, can result in both loss of revenue and loss of reputation. IT events or cyber incidents among third parties, including suppliers or customers, can affect Addtech’s capacity to deliver products and services and to generate profits.

To safeguard stable IT environments and prevent incidents, Addtech conducts regular risk assessments, as well as maintenance and reviews of the IT security at both the Group and subsidiary levels. Addtech work with systematic analysis to identify and assess IT risks. Addtech also engages external cyber security experts to ensure that the level of security is adjusted and updated on the basis of prevailing threat scenarios and customers’ increasing cyber security demands.

 

There is a risk that Addtech’s operations, earnings and cash flow could be affected by strong seasonal effects driven by customer demand.

No significant seasonal effects are associated with Addtech’s sales of high-tech products and solutions to companies in the manufacturing and infrastructure sectors. However, the number of production days, customer demand and the willingness to invest may vary from one quarter to another.