RISK & RISK MANAGEMENT

The ability to identify, evaluate, manage and follow up risks constitutes an important part of the governance and control of the business activities. The objective is for the Group’s targets to be achieved through a well-considered risk taking within set limits.

The risk work is governed at an overall level by the Board, which is responsible for the risk management before the shareholders. At an operational level, the risk work is managed by the CEO, the management team and other employees. As a basis for the operational risk management, which is handled at all levels in the organisation, there is a Code of Conduct and a number of overall policies. Risks related to business development and strategic planning are prepared in Group Management and decided on by the Board.

Group Management continuously reports risk issues regarding the Group’s financial position and compliance with the Finance Policy to the Board. Midsona has an iterative risk management process, which constitutes a basis for the Group’s work with risks. The process aims to provide a Group-wide overview of risks, by identifying, evaluating and preparing decision documentation for risk management and to enable follow-up of the risks and how they were handled. 

In the risk management process, a number of risks were identified that were categorised into four risk areas – operational risks, market risks, financial risks and sustainability risks. The account of the various risks in the respective risk area does not claim to be exhaustive, nor is it ranked by order of importance. Not all risks are described in detail, and a complete assessment must include other information and a general assessment of external conditions.

For more information about Risk Management, see Annual Report 2020 pages 80-91.

Business ethical
Our reputation is a central risk and it is of utmost importance that customers, business partners, investors and consumers associate our operations and our brands with positive values, with both a favourable
reputation and credibility being essential for business value and sales success.
Reputation and credibility can easily be damaged if we, a supplier, or a partner, for example, harm the environment, exploit labour or our suppliers’ labour, produce harmful products or otherwise behave, in our operations, contrary to the Company’s values and brands, with negative sales trends
and negative business value as a result.

Insurable risks

Production facilities, production equipment and others assets can be damaged
by fire, power outages or other physical hazards due to environmental and climate changes, such as flooding. Insufficient insurance protection can cause negative effects on the Group’s financial position in the event of an injury. An unplanned production interruption can directly affect deliveries to customers, because we have relatively few days of finished products in stock.

Information systems

The operations are dependent on a wellfunctioning and secure IT infrastructure. Disruptions or faults in critical systems have a direct impact on our production and distribution, as well as on our financial reporting. It can be caused by system overload, low competence, external influences
in the event of burglary and hacking or physical damage to the infrastructure.
Sophisticated data infringement and deficiencies in the handling of customer and employee information can damage financial capacity and reputation.

Skills and training – a critical resource

The operations require both business and product expertise. The Group’s development is affected by the availability of competent and motivated employees, as well as the knowledge, experience and commitment of management and other key individuals.
Development could be negatively affected if one or more of these key individuals were to leave the Group or if, for lack of training, the Group is unable to recruit and retain qualified employees.

Suppliers and delivery capacity

Purchases of raw materials, packaging and packaging materials, as well as of finished goods, are sourced mainly from suppliers in Europe, South America and Asia. There is a risk that suppliers cannot deliver ordered
quantities on time as a result of production disruptions, capacity shortages or other causes, which can in turn negatively impact commitment to the relationship to our customers.

Production technology risk

The Group maintains eight production facilities, five for organic products, one for healthfoods and two for consumer health products. These are located in Sweden (1), Denmark (2), Finland (1), Germany (2), France (1), and Spain (1). At the production facilities in Denmark (1), Germany (1), France (1) andSpain (1), significant volumes of certified organic products are produced for our priority brands. The risk of unplanned interruptions to production could cause deliveries to customers being directly affected, as we keep relatively few days of finished goods in stock. Accordingly, shortcomings in production technology or production disruptions due to external influences, such as fire, extreme weather and chronic climate change, constitute a core physical risk.

Safe products

Sustainable products and brands are cornerstones of the operations. There is always a risk of serious product liability incidents. Content documentation and information on how the products are manufactured is
of utmost importance in assuring sustainable products. A lack of such documentation and information could have major negative consequences for Midsona. Handling foods imposes rigorous demands on traceability, hygiene and handling. Poor safety checks can lead to contamination, allergic reactions, personal injury or other types of injuries.
Product management deficiencies could impair our reputation and our stakeholders’ confidence in our products, and may require defective products to be recalled or bought back.
Recalls can damage our overall reputation and can be costly. Product liability claims can also be made if a product is considered to have caused personal injury.

Inspections, permits, certifications and licences

Midsona’s operations requiring permits and such permits must be renewed at regular intervals. We also have a number of important certifications and licences for the operations that must be maintained, with inspections to handle. Operations could be adversely affected in the event that we fail
to meet the set requirements in inspections by the authorities or other organisations, with permits, certifications and licenses being revoked as a result.

Structure and organisational changes

In connection with acquisitions, there are risks in the selection and valuation of possible target companies, as well as in the acquisition and integration process. An integration of an acquired business is a complicated process, which is not always successful. The integration costs can be higher than expected and synergy effects can be less than expected or take more time to realise. Acquired intangible assets with indefinite useful lives are subject to
annual impairment testing and if they are not considered to be correctly valued, it may result in an impairment, which negatively affects the Group’s earnings.
Large organisational changes can entail a risk of higher costs or lower income than expected, that key individuals quit, or that estimated
savings are lower that set targets. Furthermore, insufficient caution with
regard to sustainability, purchasing and quality issues can harm the Group and affect its sustainability governance.

Distribution agreement

About 15 percent of our sales of goods derives from distribution agreements, with an exclusive right to market, sell and distribute other companies’ products in a defined market. Normally, agreements extend over a period of one to five years and can, under certain circumstances, be cancelled prematurely
if, for example, agreed minimum sales volumes cannot be achieved. There is
always a risk that we will not manage to extend distribution agreements or enter new distribution agreements with acceptable terms.

Competitors – and, at the same time, customers

Our customers are primarily pharmacy, FMCG and healthfood retail chains. To a varying extent, these players offer competing products that they sell under their own brands (private label), which are growing stronger each year and that occupy an increasingly large share of the product range on shop shelves. These actors are also not dependent on individual brands and can hold back price increases and require greater marketing efforts. If these players continue to broaden their product ranges under their own brands, this could lead to further competition and increased price pressure, which would affect our sales and results negatively.

Consumer behaviour and trends

The consumers change their buying behaviour and new consumption trends come and go. There is always a risk of not capturing such changed consumption behaviours in time or when new trends arise, leading to a
loss of competitiveness against competitors.

Prices for raw materials

The raw material price trend is largely linked to supply and demand, which is beyond the control of the Group. The price of a large part of the raw materials we purchase is dependent on whether the harvest is good or bad. Some commodities are also affected by agricultural policy decisions, subsidies, trade barriers and activities on commodity exchanges.

Financing risk

Financing risk refers to the risk that future capital procurement and refinancing of maturing loans become difficult or costly.

Credit risk

that the Group has cash and cash equivalents, financial investments or entered derivatives with cannot fulfil their obligations, a so-called financial credit risk. There is also a risk that our customers cannot fulfil their payment commitments, a so-called customer credit risk. The 10 largest customers accounted for 43 percent (46) of the total net sales.

Liquidity risk

Liquidity risk refers to the risk of not being able to fulfil payment obligations when they come due as a consequence of an inadequate access to liquid funds.

Interest rate risk

Interest rate risk refers to the impact on profits of a change in interest rates. How quickly a change in interest rates affects profits depends on the period of fixed interest on credit and investments. The Group is a net borrower and does not invest funds in listed instruments, which is why it is mainly the Group’s interest-bearing liabilities to credit institutions that are exposed to
interest rate changes. The main part of our interest-bearing liabilities to credit institutions has variable interest.

Currency risk – transaction exposure

The Group’s sales of goods are conducted primarily in the currencies SEK, NOK, DKK and EUR, while purchase of goods is made primarily in EUR and USD. The net exposure in EUR is significant depending on the purchases exceeding the sales, which however is dampened by a positive net exposure in DKK, which tracks the EUR.

Employee health – a healthy culture

The work environment has a major impact on how we feel, both when we are at work and after work. One of our foremost risks with regard to personnel is health. Midsona seeks to promote a healthy culture with an even gender distribution, in order to stimulate and motivate our employees to good health,
based on each employee’s own opportunities and level of satisfaction. High levels of absence due to illness and other kinds of absence can have consequences for operations both in the ability to implement and the capacity to recruit new employees through the impact on the Company’s reputation.

Diversity and equality

Lack of diversity and equality among our employees, even in management positions, can have consequences for the Company’s operations in that we may miss opportunities that diversity and equality generate.
Valuable skills can be missed, thereby limiting our capacity for innovation. This could cause major consequences for Midsona’s reputation in society.

Responsible purchasing

Poor conditions at our suppliers can have major consequences for our reputation, as well as business relationships, product quality and ultimately profitability.

Corruption risk

Risks related to corruption can damage our reputation and it can also affect business relationships and ultimately profitability and cause socio-economic consequences.

Environmental conditions, terms for efficient use of transport and resources

Transport (both freight and business travel), water and energy consumption, packaging waste, production waste and food waste are the most important sources of our environmental and climate impact at our offices and production facilities. Food production consumes substantial quantities of water and our consumption of fresh water use poses a risk to Midsona.
There is also a risk of negative climate impact from the use of fossil fuels in freight transport and business travel, as well as in our own operations at our offices, warehouses and production facilities. The impact of business operations on the climate is one of the foremost global challenges for all sectors.
There is a risk that we are insufficiently knowledgeable about our own negative impacts on the climate based on greenhouse gas emissions 1 (direct), 2 (indirect), 3 (indirect upstream and downstream) that could lead to inadequate climate data and thereby a risk that essential measures
against climate change are not taken.

Changed price level and availability of raw materials and products

The ability to secure raw materials and finished products even in weather-related and/or other physical conditions caused by climate change can affect our operations and profitability. The consequences may also affect the supply and expense of renewable fuels, which can in turn affect our transports. We buy raw materials and finished products mainly from suppliers in Europe, South America and Asia. There is always a risk that the supplier will not be
able to deliver ordered quantities on time due to physical/environmental impacts and environmental disasters caused by climate change. This can lead to shortages of raw materials, production disruptions, capacity shortages, increased prices and in the long run other unexpected events, which in turn can negatively affect our delivery capacity and the relationship with our customers.
Good or bad harvests and, in the worst case, climate catastrophe affect the pricing of a large part of the raw materials we buy. Lack of controls in the event of a climate catastrophe also increases the risk of inadequate food safety, for example, poor control can lead to contamination, cases of allergic reactions or various types of damage.