Risk Management
As an internationally operating group of companies, CEWE COLOR HOLDING AG and its subsidiaries are subject to different risks that could negatively influence the operations, the assets, financial and earnings position of the group. For this reason, CEWE COLOR HOLDING AG has established, in accordance with the professional standards of the industry, an internal control and risk management, to detect and evaluate potential risks as early as possible, and to initiate appropriate counter measures, if required. The control and risk management is an integral part of the operation, planning, accounting and control procedures into the information and communication system of the CEWE COLOR Group, and is an essential part of the management system of the CEWE COLOR Group. The control and risk management is based on a systematic process of risk detection, evaluation and monitoring comprising the entire group.
Thus the control and risk management is one of the original tasks of the Board of Management, the heads of the regional profit centres in Germany and abroad as well as the central departments and the project managers. The primary responsibility for implementation of the control and risk management lies in the hands of the Board of Management.
The risk management system collects the risks of the individual risk areas in an annual group-wide risk inventory. Based on this list the annual risk report is prepared. During the course of the year, at least one review of the risk evaluations takes place per quarter. These reviews are then reported to the Supervisory Board on a quarterly basis. Newly revealed risks are entered in the risk management system following the report of the risk manager, and allocated to a risk officer. To the extent required, the assessments of individual risks lead to respective provisions.
The internal control system is an integral part of the business procedures of CEWE COLOR Group, it comprises a number of supervision and steering mechanisms, and is essentially based on four principles which are explained in detail below:
- Principle of dual control
- Integrated reporting system
- Separation of functions
- External / internal audit
The “Principle of dual control” is guaranteed by regulations such as articles of association, guidelines, rules of procedure, instructions as well as right of representation and authority to sign. Another steering and monitoring mechanism is represented by the IT authorisation concept of the CEWE COLOR Group, which specifically governs the access and activities of individual persons and groups of persons to the predominantly SAP-based applications and their functional areas.
The “Integrated reporting system” comprises a detailed planning, steering and reporting concept on the state and the prospects of the group. The retrograde form of planning is targeted towards monthly plan figures. The existing group information system is guaranteed both at the level of the individual profit centres and at board level by monthly target-performance year-to-year comparisons, and additionally by cross-location business reviews. Here, developments, opportunities, risks as well as measures are discussed and documented accordingly.
In order to secure the safety of operations and at the same time the quality of the individual processes, a “Strict separation of functions” of critical business processes is implemented at the CEWE COLOR Group. Central tasks are, moreover, allocated to certain functional areas, thus implementing a mutual responsibility of control.
Furthermore, all group companies are subjected to an “External audit” in finance and accounting as well as an “Internal audit” in the remaining functional areas at regular intervals.
Within the scope of the control and risk management system the CEWE COLOR Group monitors the intrinsic value of its shareholdings in subsidiaries. The book values of the investments are subject to regular corresponding “Impairment tests”.
In the following, the individual fields of risks are divided into five areas:
- Operating risks
- Financial risks
- Strategic risks
- Business and logistics risks as well as
- Legal risks
Operating risks
The market for films and analogue pictures is currently decreasing by approximately 35 % to 40 % per year. The increasing quantity of digital cameras, however, does not necessarily lead to an increase of the printing volume for digital photos, since many digital photos remain on the hard discs and are not printed on photographic paper. The CEWE COLOR Group sees an opportunity of increasing the print volume for digital photos in the product CEWE COLOR PHOTOBOOK. In the Internet the volume of calendars with digital photos was again markedly increased at the end of the year.
Moreover, the buying behaviour of photo products as vacation and leisure time products is being influenced by the economic development in Europe. The economic forecasts on hand (here based on Eurostat) expect a definitely positive economic development in all groups of countries for the year 2010. Whereas a rise of the gross domestic product (GDP) of 1.0 %, or respectively 0.5 % is expected for Central and Western Europe, a slight decline of the GDP of – 0.1 % is expected in the Benelux countries. Central Eastern Europe expects a rise of 1.2 %.
Economic development
Apart from the development of quantities the price is decisive for the success of the company. Here, the branded product CEWE PHOTOBOOK with its outstanding qualities, the leading software with the order wizard as well as the consistently expanded product range is the key to success. In the analogue sector the prices will again be adjusted to the increased production costs owing to the declining quantities.
With respect to the photo paper suppliers, we are currently focussing on the suppliers DNP, Kodak and Fuji. However, further suppliers are on the market. There are further interesting suppliers for paper for digital printing. The procurement risk for investment goods and photo pouches was reduced thanks to new suppliers, or respectively a risk-oriented selection of suppliers. In general, we have developed alternative suppliers for strategic articles by risk-oriented points of view.
The rising concentration in the retail business leads to a slight increase in dependency on major customers. In comparison to other companies, it can be rated as a positive aspect that the five largest customers with their individual distribution channels account for more than 40 % of the CEWE COLOR sales.
In the area of environmental risk, which is monitored by regular internal controls at all production sites, no violations against environmental provisions were registered in 2009 either.
In the past business year, the commercial and technical IT was again examined by an external auditing company to further improve IT security and to raise efficiency.
Financial risks
Owing to the increasing turnover in the retail business in Central Eastern Europe and Norway, or respectively Sweden, the portion of the turnover generated outside the euro zone increased by 37.4 %. On the other hand, we have our own production sites in many countries so that no effects threatening the company’s survival have to be expected from currency risks. Owing to losses from exchange rates of 17.7 million euros, the turnover in euros was reported lower than the corresponding growth in local currencies. No forward currency deals were concluded to hedge exchange rates.
In the production process silver is gained and harvested. The risk in the marketing of silver is the achievable silver price. Due to the low silver harvest, however, the risk of marketing silver tends to decline.
The interest rate risk is limited by the solid equity rate of 41.6 % and by further medium-term fundings, in part even at fixed interest rates, or terms respectively. Our funding is secured despite the financial market crisis; the corresponding credit lines were renewed and extended. We assume that we will be able to meet the general conditions (covenance) of our loan agreements.
The receivables risks were insured in accordance with their importance. No essential losses occurred in the expired business year due to the insolvency of major customers and the self-retention of the insurance. Credit risks going beyond this were sufficiently accounted for by specific allowances amounting to 1,134 thousand euros (last year: 1,003 thousand euros). In view of the financial market crisis, the accounts receivable department has followed an even more restrictive course in managing accounts receivables.
In addition to the investments for machines and plants, the item of internally generated software and other intangible assets is gaining importance. The investment budget of the past year of originally 27.0 million euros was adhered to, at 27.4 million euros (2008: 33.3 million euros).
Strategic opportunities and risks
The transition from analogue to digital business and the rising significance of the Internet as an order channel led to a further expansion of our programming and development capacities in this area. By focussing the development activities on our own employees, we attempt to further expand our advantage with a view to our competitors.
Our subsidiary CEWE COLOR Ltd. England, Warwick, taken over in 2005, achieved an almost break-even result.
A positive result is aimed at for 2010 through additional volumes generated by new customers.
Costs of operation and logistics
The restructuring programme of analogue / digital transformation was completed with the shutdown of the production in Paris. Operating business risks due to the failure of machines are considered as being low.
Since a large number of transport companies is used, the logistics risk is calculable, the risk of fuel price increases exists.
Legal risks
Legal risks from current proceedings or other disputes which could threaten the company’s existence are currently not recognisable. Provisions for risks have been made to a sufficient extent for risks of litigation resulting from the current business.
The certifying auditor reported directly to the Supervisory Board at the occasion of the meeting of the Audit Committee of the Supervisory Board of April 8, 2010. According to the opinion of the auditor the risk management system fully complies with the requirements of Section 91 (2) AktG.
