Risk management

Financial risks

Currency risk

Transaction exposure

The Group’s transaction exposure arises primarily in the Swedish companies where a large proportion of revenue is generated by the global sales organisation and is not in SEK. Other companies mainly conduct operations in their national markets where revenue and costs are in the same currency as each company’s functional currency.

Aside from currency risks on sales by the Swedish companies, risks also arise from the import of raw materials and components. Altogether, the Swedish companies have a surplus inflow of foreign currency. The direct commercial foreign exchange flow, after net calculations of flows in the same currencies, shows a surplus of MSEK 221 (56). In addition to this, there is also an indirect impact in conjunction with the purchase of raw materials and components. This results, over time, in a lower net exposure for the Group.

Our policy is to hedge all significant net cash flows. Incoming flows of foreign currency should be used for payment in the same currency. In addition, a certain portion of the anticipated net inflow from sales and purchases is hedged by means of forward contracts after individual assessment at 50 per cent for the coming six-month period. On statistical assessment of the foreign-exchange position, a change in the Swedish krona against other currencies of 1 per cent, with all other variables being constant, would impact the Group’s earnings by about MSEK 1 (1). The financial instruments are managed by the Parent Company’s senior management. We do not apply hedge accounting for these contracts.

Translation exposure

Currency risk also arises in conjunction with the translation of foreign net assets and earnings, so-called translation exposure. This currency risk is not hedged and refers, primarily, to the translation of foreign subsidiaries’ income statements and balance sheets. Earnings from foreign subsidiaries are translated into Swedish krona based on the average exchange rate for the year. The exposure of the Group’s net assets outside of Sweden has increased as operations there have changed from previously pertaining to sales companies, to now also including production units. On the closing date, net assets in foreign companies corresponded to MSEK 6,527 (6,173) including goodwill. We apply hedge accounting where the purchase consideration for acquired companies has to some extent been financed through borrowing in the acquired company’s local currency. Net assets abroad that are subject to hedge accounting amounted to MSEK 290.8 (306.6) and accumulated borrowings of MSEK 213.0 (213.7), which reflects a hedging quotient of 73 per cent (70). Annual translation differences recognised in other comprehensive income concerning borrowings as hedged net assets amounted to MSEK 0.6 (17.3) before deferred tax of MSEK 0.1 (3.6). Annual translation differences recognised in other comprehensive income concerning borrowings as hedged net assets amounted to MSEK 27.0 (27.6) before deferred tax of MSEK 5.6 (5.7).

A weakening of the Swedish krona by 1 per cent with all other variables remaining constant would result in an increase in equity of MSEK 72 (62) largely due to gains/losses on the translation of EUR and GBP. A change in the Swedish krona of 1 per cent against other currencies would result in a direct impact on net sales in the subsidiaries of approximately MSEK 73 (71).

The sensitivity analysis for currency risk regarding translation exposure pertained to receivables and liabilities at the end of the reporting period given in a currency other than the respective Group company’s functional currency. The table below shows exposure per significant currency and the effect of a 1 per cent change in the exchange rate on companies in the Group.

Interest-rate risk

Fagerhult Group holds no significant interest-bearing assets, which is the reason that our income and cash flow from operating activities are, in all material aspects, not independent of changes in market interest rates.

Our interest-rate risk arises in conjunction with long-term borrowing. In addition to pension liabilities of MSEK 158.9 (173.1), interest-bearing liabilities totalled MSEK 2,799.6 (3,349.5) and cash and cash equivalents were MSEK 1,272.2 (1,291.7). Borrowing on the basis of floating interest rates exposes the Group to interest-rate risk as regards cash flow. Borrowing with fixed interest rates exposes the Group to interest-rate risk regarding fair value. Our policy is to use a fixed-interest period of three months. During 2023 and 2022, the Group’s borrowings largely comprised loans with three-month fixed interest rates.

We analyse our exposure to interest-rate risk on a dynamic basis. Various scenarios are simulated, whereby refinancing, re-negotiation of existing trading positions, alternative financing and hedging are taken into consideration. Based on these scenarios, we calculate the earnings impact from a given change in interest rates. In each simulation, the same change in the interest rate is applied for all currencies. The scenarios are simulated only for those liabilities comprising the largest interest-bearing positions. Simulations performed show that the earnings impact of a 1 percentage point change would be a maximum of MSEK 28 (33), with the current capital structure. The simulation is conducted quarterly to verify that the maximum possible loss is within the limits established by the executive management.

If interest rates on borrowing in Swedish krona as of 31 December 2022 had been 10 basis points (10) higher/lower, but all other variables had been constant, then gains after tax for the financial year would have been MSEK 2.2 (2.6) higher/lower, primarily as an effect of higher/lower interest expenses for borrowings with floating interest rates.

Credit risks

Credit risks are managed at Group level. Credit risks arise if the counterparty does not fulfil its commitments in conjunction with lending within the framework of cash management policies and through credit exposure to clients and banks, including receivables and agreed transactions. If our customers have received a credit rating from an independent rating institution, these ratings are used. Where no independent credit assessment exists, a risk assessment is made of the customer’s credit status in which the entity’s financial position is considered, as well as previous experience and other factors. Individual risk limits are set based on internal or external credit ratings, in accordance with the limits set by the Group management. The application of credit limits is frequently reviewed. No significant losses occurred in either 2023 or 2022. Of the trade receivables carrying amount, MSEK 405 (450) is covered by credit insurance. A total provision of MSEK 68 (72) was made for expected credit losses. The average confirmed credit losses amounted to 0.11 per cent (0.10) of net sales calculated for the next five years.

Liquidity risk

Liquidity risk is managed by ensuring that we have sufficient cash and cash equivalents and short-term investments in a liquid market, available financing through agreed credit facilities and the possibility to close market positions. We have a strong financial position. At present, no new borrowing requirements exist, but should such requirements arise, there is currently no difficulty in obtaining external credit, as long as such credit meets certain covenants, on the borrower, such as debt-to equity and interest coverage ratio, which are at present satisfied.

Management also meticulously follows rolling forecasts for the Group’s liquidity reserve on the basis of anticipated cash flows.

Capital risk

Our objective with regard to the capital structure is to secure our ability to continue our operations, so that they can continue to generate returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to keep the cost of capital down. To maintain or adjust the capital structure, the Group may change the dividend paid to shareholders, repay capital to shareholders, issue new shares or sell assets to reduce debt. We monitor capital on the basis of debt/equity ratio. This ratio is calculated as interest-bearing liabilities in relation to equity. The debt/equity ratio on 31 December 2023 was 3.2 per cent (2.5).

Operational risks

Structural changes and changes in economic conditions

Market demand for our products, and thereby our sales, are impacted by factors outside of our control. An economic downturn in the markets where we operate could result in lower demand for our products. The most material sensitivity to the economic cycle is assessed at present to be the parts of the operations that deliver to customers in the construction and property sectors, and customers in the retail sector. In the same manner, structural changes in the markets where we operate could give rise to lower demand for our products. For example, changed consumption patterns and an accelerated transition from physical stores to online stores could negatively impact the segment of the operations that delivers to stores and warehouses. In both cases, the changes may negatively affect our operations, earnings and financial position.

Moreover, there is a risk that our customers in sectors that are currently less sensitive to the economy would be negatively affected by extended periods of weak economic growth, high unemployment or other negative economic trends, primarily in Europe, or general concerns in the euro-zone, with a resulting decline in the capacity to pay. Accordingly, an economic downturn could negatively impact the operations, earnings and financial position.

Competition

We meet direct competition in all product segments and in all geographic markets. Our long-term growth and earnings are therefore dependent on adapting to customers’ needs, changes in industry requirements and on introducing attractive new products and services, in parallel with maintaining competitive pricing. To maintain our competitiveness, we must predict customers’ needs and develop the products and services in demand with and accepted by these customers. Should we fail to maintain a competitive position in terms of quality, product prices, security of supply, brand recognition and a broad product offering, this could have a negative effect on the operations, earnings and our financial position. Furthermore, we need to adapt to changing market conditions or otherwise compete successfully with our competitors.

All segments and all markets entail the risk of new competitors capturing market shares with the support of a product offering with which we cannot compete. Such competing products and services could reduce demand for our products. This could negatively impact the operations, earnings and financial position.

Geopolitical and macroeconomic risks

We have operations in about 30 countries. The operations are exposed to risks related to geopolitical concerns and instability as a result of, for example, political or diplomatic crises. war, terrorism, regional or cross-border conflicts, natural catastrophes, strikes and other geopolitical circumstances in the jurisdictions where we conduct our international operations. Factors and events similar to the above in the operating environment could negatively impact our operations, earnings and financial position.

Inventory risk

Products held in inventories entail a risk of becoming obsolete as a result of outdated technology or over production, if we are unable to adapt production to technological developments or to customer preferences. In both cases, the changes could negatively affect the operations, earnings and financial position.

Operational risk

Our operations depend on reliable and efficient production units to ensure that the products are delivered on time and meet quality expectations. Our operations could be affected by operational disruptions due to, inter alia, late or incorrect deliveries, technical faults, labour law measures, accidents or erroneous administrative routines. There is also a risk that those measures implemented for the purpose of avoiding disruptions could prove inadequate should a larger disruption occur. This could negatively impact the operations, earnings and financial position.

Supplier risk

To be able to manufacture, sell and deliver products, we depend on external suppliers’ availability, production, quality assurance and deliveries. Moreover, we are dependent on a few main suppliers for LED components, which would take a long time to replace. Faulty, late or missed deliveries from suppliers of different kinds could entail that our deliveries are in turn delayed or cancelled, or are faulty or incorrect, which could have negative consequences for our customer relations and lead to lower sales. This could negatively impact the operations, earnings and financial position.

Risks pertaining to operating costs

Our costs for manufacturing products are impacted by costs for, inter alia, purchasing manufacturing input materials. Those individual components that most impact costs comprise electronic components and sheet metal. Large price changes for input material we purchase could entail a negative impact on the operations, earnings and financial position.

In terms of the cost of adding value in the form of manufactured products, wage trends for employees track the general wage trends in the labour markets of the respective countries, which in turn is largely dependent on the economy as a whole. Unexpected large wage increases and/or increased average sick leave among the staff could entail a negative impact on the operations, financial position and earnings. The cost of adding value to manufactured products also includes energy costs, which are dependent on developments in the environmental and energy sectors. Rising energy costs could entail a negative impact on the operations, earnings and financial position.

Product liability

Our products expose us to potential claims if the products do not function as expected or prove to be defective, or if use of the products causes, results in, or is claimed to have caused or resulted in personal injuries, damage to property or other negative effects. Our products make various safety risks relevant, including electrical risks, mechanical risks, thermal risks and exposure to electromagnetic fields. Requirements covering product liability, irrespective of whether they pertain to project delays or other injuries, could prove costly and time-consuming to defend and could potentially damage our reputation and result in material negative effects for the operations, earnings and financial position.

Insurance

We purchase and manage Group-wide insurance policies for property and liability risks, thereby creating co-ordination gains and cost advantages. Our insurance programme encompasses, inter alia, a global liability insurance, which covers general liability and product liability. Limits apply to the scope and amounts of the insurance cover. For example, the cover does not encompass liability for delays and faults that do not lead to product liability. There is a risk that we do not receive full compensation for any damage that arises or claims that can be directed at the company, which could have negative consequences for the operations, earnings and financial position.

Dependence on key individuals

The Group is dependent on being able to retain and recruit employees and senior management with key competence. There is a risk that one or more members of senior management or key individuals leave the Group at short notice. Where we fail to retain such key personnel, and/or fail in the future to recruit key personnel, this could have negative consequences for the operations, earnings and financial position.

Permits

Several of the manufacturing companies in the Group have operations that in some form require permits. We currently possess all necessary permits, mainly environment-related, for conducting operations. However, there is a risk that these permits may not be renewed or may be withdrawn or limited. Moreover, there is a risk that our interpretation of applicable laws and provisions concerning the operations, or the relevant authorities’ interpretation of these or their own established practices, are not entirely correct, or that such rules, interpretations or practices are changed. Such changes could entail more permits being required for operations, which could be both time-consuming and costly as well as negatively impact on the operations, earnings and financial position.

IT risk

We need to use IT systems to manage, inter alia, deliveries of products and input materials as well as to receive and manage customer orders. A major part of our operations is aimed at customers who set stringent requirements for reliable and exact deliveries, which in turn sets high requirements for functioning and secure IT systems that are well-integrated with our various business segments. Maintaining, developing and investing in such systems requires significant capital investment and other resources. There is a risk that future investments required in IT systems will be greater than our expectations. Moreover, there is a risk that our IT systems are disrupted by software and hardware issues, computer viruses, hacker attacks and physical damage. Such problems and disruptions could, depending on the extent, negatively impact on the operations, earnings and financial position. As computer-aided technology has assumed an increasingly greater scope within the companies, security requirements have also increased. The functional security of the databases and e-mail servers is checked via daily backups. Battery backup and diesel generators provide protection against operational disruption in the main manufacturing facility in Habo, from where the majority of the Group’s computer operations are controlled. To date, no costs have arisen as a result of damage. The internet connection is fixed and completely isolated from other networks via hardware firewalls. User access to the system is regulated via group authorisations and entitlements based on actual assignments and roles within the company.

Sustainability risks

In various ways, the Group’s operations are associated with sustainability risks. Awareness and action regarding these risks are fundamental to our sustainability efforts. We have identified and analysed the most material sustainability risks in the Group’s own operations and value chain. We identified which consequences these could have, from an impact perspective as well as in relation to our financial position. The risk analysis includes sustainability topics that we deem we have a significant impact on people and the envirnment.