Risks are an integral part of entrepreneurship. The trick is to limit these risks as far as possible without impeding the company’s entrepreneurial drive. The ‘Management System’ at Nedap, as described elsewhere in this report, forms the procedural basis for identifying risks as early as possible and taking measures where necessary. The Controlling Groenlo Department plays a leading role in this respect. The risks at Nedap can be broadly divided into risks that are inherent in entrepreneurship and risks that arise from breaches of company or social standards and regulations, such as fraud.
Revenue and expenses
Nedap’s entrepreneurial and project-based nature means that its revenue varies annually. Due to the high added value (in percentage terms) of the company’s revenue (revenue minus materials), fluctuations in revenue will generate more than proportionate percentage variances in the result. New products and systems and the project-based nature of the revenue, combined with relatively short project lead and delivery times, make it difficult to estimate future revenue.
Various internal and external factors can also have both a negative and positive impact on revenue. Important factors in this respect are delays during technical and/or market development, start-up problems with new products, intensified price competition, exchange rates (mainly the US dollar), government decisions and macroeconomic developments. However, Nedap has a broad product portfolio. It has developed products for highly diverse markets, including retail, healthcare, energy, livestock farming, libraries, access control, water treatment and lighting. The diversification policy makes Nedap less sensitive to economic developments in one market.
The markets in which Nedap is active are set to undergo radical change in the coming years under the impact of increasing transparency and convergence. The markets will be larger in scale, more international in character and more fiercely competitive. New online applications in particular are leading to improved transparency, which makes it easier for customers to compare competing propositions around the world. At the same time, the introduction of new technologies means that existing products can abruptly become less relevant.
New product developments can also be adopted at lightning speed by markets all over the world. Initial imperfections in products can therefore lead to larger losses for, and corresponding claims from, end users. Nedap takes great care to guarantee the quality and safety of its products, using standards that are partly based on laws and regulations as well as test and control systems.
But it is not only technic al risks that are increasing. The much larger scale of projects, many of which are implemented at locations around the world, is also giving rise to much greater project, certification and legal risks. Managing these risks will become increasingly important in the future and will consistently be taken on board as an integral part of the development of new propositions.
Delays during the technical and/or market development of new products can also lead to substantially higher costs. As external increases in raw material and commodity costs cannot always be recharged to customers, margins can come under pressure. Rapid economic obsolescence of components, the abortion of product launches and the sooner-than-expected ending of product life cycles can necessitate substantial write-downs on inventories. Nedap’s Road to Excellence programme was partly set up to mitigate these risks.
Risks arising from customer insolvency are reduced wherever possible with credit insurance. Controlling in Groenlo continuously monitors the currency markets and assesses to what extent currency risks can and must be hedged in specific situations.
Besides making many markets more fiercely competitive, the aforementioned changes are also spurring a radical realignment of market positions. The gap between winners and losers will also widen in this uncompromising struggle for new market positions. The losers who fail to keep up with developments can see their markets vanish overnight, while the winners will be confronted with surging demand that will need to be effectively managed.
In the coming years, therefore, Nedap must continue investing in the quality of its propositions and in the scalability of its organisation in order to respond adequately to the growing demand for its products and services. Nedap’s solid financial policy also offers the company scope for making the most sensible strategic decisions for its long-term future.
Nedap’s competitive strength derives largely from the talent, dedicated efforts and enterprising spirit of our staff. One of the largest risk factors for Nedap therefore remains the ability to attract and retain the right people. Accordingly, a lot of attention is devoted to the recruitment of new talent, the further development of the talent that is already available within the organisation and the better utilisation of talent.
The value of defined benefit pension entitlements is calculated according to IFRS reporting rules. The calculations are based on capital market interest rates and can therefore show strong annual fluctuations. The resulting gains or losses must be taken directly to equity. This increases the volatility of solvency. Nedap’s actual pension obligation, however, remains limited to the payment of the annual contributions and single premiums.
To maintain the entrepreneurial drive that makes Nedap strong, the company’s financial objectives are an operating profit of at least 10% of revenue and a return on equity of 15% to 20%. In view of Nedap’s innovative character and the largely project-based nature of its work, a solvency ratio of about 45% (disregarding IAS 19), based on organic growth, is considered desirable. Dividend payable is not included in equity. The operating profit for 2013 amounted to 6.8%, the return on equity was 21.2% and the solvency ratio stood at 41.0%. Nedap expects to achieve the set objectives in the medium term.
The risks attaching to the use of financial instruments are described in the section on financial risk management in the financial statements. The financing agreement with the bank contains no covenants. No specific reports are submitted to the bank.
The added value of revenue is largely created in the Netherlands. The income tax expense therefore largely consists of Dutch corporate income tax.
Nedap’s policy is targeted at organic growth, which is subject to fewer risks than acquisition-driven growth.
The informal, enterprising corporate culture is one of the key mainstays of the success of the Nedap organisation, but it also heightens the risks inherent in doing business. The daily direct contacts of the Board of Management and the Controlling with managers and employees in Groenlo limit these risks. It is imperative that employees are aware of the risks and also articulate and discuss these risks amongst one another. After all, awareness of risks is the first step towards managing them. A careful consideration of all risks must automatically form part of information flows and decision-making.
Members of the Board of Management and Supervisory Board as well as other managers should set an example, as this will encourage others to follow the same high standards. They must create a culture where full justice is done to risk management. The actions and behaviour of Nedap and its employees must be characterised by integrity at all times. This integrity is not based on all manner of formal rules, but on what every normal person knows to be right or wrong.
Close contact is also maintained with the group companies at home and abroad. Nearly all group companies are controlled from the market groups in Groenlo. The management consists of (former) employees of Nedap N.V. Controlling in Groenlo also monitors the risks relating to the group companies. These group companies make use of the central ICT infrastructure.
The Dutch group company Nsecure B.V. in Barendrecht and the 49.7% equity interest in Nedap France S.A.S operate virtually independently. Nedap Iberia S.A., which undertakes activities in Spain and Portugal, operates under Spanish management but works closely together with the market groups in Groenlo.
Risks arising from breaches of company or social standards and regulations, such as fraud
Apart from social control, managers play an important role in preventing fraud and other forms of inappropriate behaviour at Nedap. They must set the right example and, through ‘hands on’ management, promote awareness of what is and what is not tolerated. In addition, the Controlling Groenlo Department continuously assesses and monitors the administrative organisations and internal measures of control, devoting extensive attention to the prevention of fraud. During the annual audit, the external auditors discuss the internal control measures aimed at preventing and detecting fraud with various officers in the organisation and with the Supervisory Board.
Nedap ensures that its intellectual property is protected wherever possible, such as with patents. This provides no guarantee, however, that third parties (are able to) infringe its rights. Any such infringements can lead to substantial losses. In addition, Nedap takes measures to ensure that it does not infringe the rights of third parties itself.