Risks & risk management
The Alcadon Group carries out most of its operational activities in Alcadon AB and its subsidiaries. The group’s operations are affected by a number of risks that could have a varying degree of influence on the group’s performance or financial position. When assessing the group’s performance, it is essential to not only consider the potential for growth but also take relevant risk factors into account. Alcadon Group’s subsidiaries are continuously engaged in risk management with the objective to identify and control the risks.
The business cycles are difficult to assess and will be significant for the company’s sales and performance. The executive management is closely monitoring the fluctuations of the economic cycle. The company’s customers are active in a number of areas, which reduces the sensitivity to business cycles.
Industry-specific risks: Changes in the Network industry often occur rapidly, and the future development may thus be associated with a greater degree of uncertainty compared with companies operating in other industries.
The role of the distributor is evolving: The role of the distributor is evolving, due, among other factors, to the present advancement of internet technology. The internet may enable both retailers and end customers to find and make contact with the manufacturer directly. The internet may allow international and European distributors to take market share from the subsidiaries of Alcadon Group. By increasing the sales of our private label brand, we have solidified our position vis-a-vis foreign competitors and added value to our customer offering, which is hard for others to compete with.
Dependence on key individuals and personnel: The group is dependent on key individuals, particularly among the senior management. The group’s performance further depends on its ability to recruit and retain qualified employees. We are working to create an attractive working environment with good opportunities for development and to be a learning organization where knowledge and experience is shared among the employees.
Customers: We are selling primarily passive network systems to companies active in installation, system integrators, and companies that operate or own data- and telecommunication networks.
The sales are divided in two main segments:
- Installation materials such as copper and fiber cables, sockets and contacts
- Testing instruments and tools
- Technical support and training
- Active equipment (switches, converters, SFP/XFPs and wireless products)
- Technical support and training
Price pressure and competition: The subsidiaries’ operations are conducted in an industry exposed to competition, which, for example, may be affected by price pressure, in turn accelerating demand for cost-efficient solutions. During the year, we have seen increasing price pressure in the market, which has contributed to decreasing margins on certain product groups. Competing companies may intensify their competition against the products of the Group. The ongoing adaptations undertaken by the subsidiaries notwithstanding, we may be forced to implement costly restructurings of the operations to maintain our market position and profitability.
The subsidiaries have an active purchasing strategy on the basis of long-term relations with suppliers in Asia and Europe. Through these cooperations, we have ensured that we will be able to meet the customers’ demands for lower prices and increasing margins. Together with the long-term perspective that we apply in both our customer and supplier relations, we have ensured endurance in an ever changing market.
Dependence on inventories: A distributor of physical products is dependent on the inventory. The subsidiaries implement high security standards to protect their warehouses from the risk of fire, water damage and theft.
Suppliers: In order to sell and deliver products, the subsidiaries depend on external deliveries fulfilling the agreed requirements with regard to quantities, qualities, delivery times, etc. Defective, delayed or unfulfilled deliveries from suppliers may in turn cause the subsidiaries’ deliveries to be delayed, deficient or faulty, which could result in decreased sales and thus affect our operations, financial position and performance negatively. We are continuously evaluating and refining the quality criteria that we, through our internal procedures, ensure that our suppliers are able to meet. This is achieved, for example, by maintaining close contacts with them and making regular visits to their premises and through third-party quality assessments and testing.
Financial risks include the risk of fluctuations in the operational performance and cash flow as a consequence of changes in foreign exchange rates, interest rates, liquidity risks and funding and credit risks.
Currency risks: The currency risk involves how the value of financial instruments varies depending on foreign exchange rate fluctuations. To manage transactional currency risks, the group purchases currencies as needed, to minimize the short-term impact on performance and at the same time create room for manoeuvre in the longer term.
Interest rate risks: The interest rate risk is that the value of a financial instrument may vary depending on changes in market interest rates. The group’s credits have variable interest rates. No investments are currently being made in capital instruments.
Liquidity risks: Liquidity risk means the risk that the company is unable to cover its need for capital in stressed market conditions. Funding risk includes the risk that loans need to be renewed at a higher cost of financing and with limited financing options, which may lead to the inability to fulfil payment obligations due to insufficient liquidity or difficulties in obtaining financing. Due to Alcadon Group’s strong capital base, these risks are not considered significant. Furthermore, the executive management is closely monitoring the rolling forecasts of the group’s liquidity reserves based on projected cash flows.
Credit risks: The group’s credit risk mainly comprises the subsidiaries’ customers’ ability to pay. Credit assessment of customers is carried out regularly in accordance with established procedures. In most cases, credit insurance is used as one of the means to mitigate credit risk. Historically, credit losses have been low.
Strategic risks mostly affect demand, and may be mitigated by a variable cost base. The executive management and the Board of Directors closely follow the economic cycle to be ready to act promptly and adapt the operations to any fluctuations.
Operational risks include the risk that the processes, systems or organization fail in some manner. The risk is reduced through continuous efforts to improve the company culture, engage with customers and suppliers, and monitor competitors.
Financial risks, such as changes in exchange rates and interest rates, are managed in accordance with established procedures.