Risks

NKT is equipped with risk management resources in the form of policies and procedures. The general purpose is to avoid, hedge and manage all material risks while at the same time NKT ptimises the opportunities which changes in the risk scenario provide.

The assessment of the probability of risk occurrence is not an absolute measure but expresses an opinion of the risks occurring in relation to one another and in the individual business segments. This assessment is the Management's subjective view and is included in order to provide insight into Management's assessment of the situation.

When assessing the risk factors the possibilities for gain are considered on an equal footing with the probabilities for loss. An improvement in the economic situation will therefore have strongest impact at Nilfisk-Advance and in the Construction (low voltage) segment at NKT Cables.

The risk factor 'Commercial conditions' includes not only the competitive situation in the market but also the relationship to suppliers, etc.

The risk description is not exhaustive and the risks are not listed in order of priority.

General Risks

NKT was exposed to a number of more general risks which are reviewed in this section. The description must be seen in context with the description of the specific risk factors which relate to the individual business.

IT risks: NKT makes extensive use of IT and is therefore exposed to operational disruptions and security issues, potentially leading to production, reputational and financial losses. NKT maintains ongoing focus on improved IT security to ensure continuing high standards.

Tax risks: NKT is subject to the tax and excise legislation in the countries in which it operates. Changes in this legislation in the relevant countries can potentially affect NKT's tax status. NKT has had extensive transactions in a number of countries and its tax status is therefore exposed to challenge by the local tax authorities. As a result NKT hedges the most material risks and prepares related hedging documentation.

Legal risks: NKT continuously monitors legislative and regulatory developments and adopts a structured approach to ensure compliance. NKT is frequently signatory to agreements, including agreements relating to operational and strategic issues. These contracts entail opportunities and risks that are assessed and hedged at the time of signature.

Insurance risks: NKT establishes statutory insurance cover and such other insurance as is deemed relevant and customary in the sectors and countries in which it operates. NKT regularly reviews its insurance policies with an insurance specialist.

Financial risks: In addition to currency risks, which are discussed in the individual company reviews, NKT is exposed to changes in interest rate risks, credit risks and liquidity risks. The NKT Group's financial risks are defined in Note 30 to the consolidated financial statements: 'Financial risks and financial instruments'.

Investments and acquisitions: As part of NKT's strategy, opportunities for sale, acquisitions and for investments in production plants, etc., are regularly assessed. Major acquisitions and investment in production plant entail various risks relating both to the investment process itself and to the subsequent integration of the investment into NKT's business. These risks are assessed and hedged as effectively as possible.

Ethical standards: In step with an increased awareness and focus among NKT's stakeholders, including employees, of human and labour rights, anti-corruption and environmental protection, NKT's CSR activities are having growing influence on NKT's reputation and therefore also on growth and earnings. NKT actively addressed handling of risks in relation to this.

 

Specific risks relating to NKT Cables

Commercial risks
Electricity Infrastructure (including submarine cables) project sales are the single biggest area of the company's business, and managing the associated project risks is crucial. Prior to bidding for major orders, a project assessment is conducted to obtain detailed knowledge and overview of the risks contained in the project. In the execution phase, project management is critically important for ensuring optimal coordination of cable production in collaboration with the customer and external installation subcontractors. Financial consequences of delays, etc., cannot always be passed on to the subcontractors. The execution and completion of a project may extend over several years.

NKT Cables operates in a competitive and mature European industry and in China. The company's competitiveness and profitability are both directly related to its ability to produce quality products with attractive unit costs and to establish close interaction with customers.

The key to satisfactory competitiveness is 'critical mass', meaning that NKT Cables must manufacture product series large enough to realise low average production costs. Sales channels and distribution strategy aim to minimise delivery costs.

Accordingly, NKT Cables has in recent years placed strong focus on 2 subjects: first, adjustment of production configuration to obtain a higher degree of product specialisation. Secondly, integration of the sales organisation under one unified management and placed in distinct geographical regions to create one face to the customer. Both initiatives will be finalised in 2012.

Metals - primarily copper and aluminium - are the company's prime production raw material and represent on average more than 50% of the selling price with the existing product mix. However, this may vary from 20 to 75% depending on product type.

Earnings sensitivity to changing metal prices is deemed rather limited as the exposure is hedged wherever possible. Where this is difficult, cost changes are reflected relatively quickly in changed selling prices. However, strong price changes may impact on earnings by way of inventory adjustments. In Electricity Infrastructure the prices are usually determined by contractual price formulas linking raw material cost developments to cable pricing. In Construction, price lists are used which during the period of their validity are subject to a variety of hedging contracts.

Financial risks
NKT Cables' currency sensitivity is primarily related to currency developments in Poland, the Czech Republic, UK, Sweden and China, and to price developments in USD-based metals.

Cyclical sensitivity
Almost half of NKT Cables' revenue - principally the part relating to products for the building industry and medium voltage products - is considered cyclically sensitive.

Around 50% of the revenue relating to Electricity Infrastructure - principally the part relating to submarine cables and high voltage cables and accessories - mainly derives from energy sector sales.This sector is normally considered less cyclically sensitive as activity is primarily determined by capacity needs created by rising energy consumption, and in particular expansion due to increased focus on improved system reliability and use of renewable energy. Also the long lead and execution times for large infrastructure projects contribute to a certain level of stability in activities.

Around 10% of NKT Cables' revenue referred to above relates to Railway where sales are chiefly determined by infrastructure projects in China and are therefore currently less cyclically sensitive. However, the political risk is deemed material.

Specific risks relating to Nilfisk-Advance

Commercial risks
In order to remain consistently among the leading suppliers of professional cleaning equipment it is crucial that Nilfisk-Advance has a competitive product programme. New quality products with enhanced productivity, reliability, ergonomics, sustainability and reduced operating costs are therefore launched on a regular basis. Nilfisk-Advance also focuses on ongoing improvements to its business systems through efficiencies in production, the supply chain, administration and sales.

Financial risks
Currency sensitivity for Nilfisk-Advance chiefly relates to USD developments, an exposure relating primarily to translation risk. A change of +/-5% in USD will affect the company's revenue in DKK terms by approx. +/- 63 mDKK and EBITDA by approx. +/- 4 mDKK. Added to this, a significant part of production for the EMEA region (Europe, Middle East and Africa) is based in Hungary which has the currency unit HUF. Net exposure is continuously assessed 12 months ahead.

Cyclical sensitivity
Nilfisk-Advance is cyclically sensitive. This is because most endcustomers are professional or institutional users for whom buying cleaning equipment is a capital expenditure. In times of slowdown customers defer investments in order to protect and optimise liquidity. A decrease in revenue of 5% is estimated to influence EBITDA by up to 100 mDKK.

Specific risks relating to Photonics Group

Commercial risks
The success of the Photonics Group companies depends on their ability to create groundbreaking products for a demanding, global, predominantly niche-type market. The ability of the companies to attract innovative and qualified employees and establish constructive interactions between technological and commercial drivers is therefore vital for success, as is the Group's ability to maintain and defend its current strong patents position.

Financial risks
The companies are international market players and therefore exposed to currency risks.

Cyclical sensitivity
The companies in Photonics Group are cyclically sensitive. The reason is that the majority of the end-customers consider the purchase of products that embody the Group's components to be capital expenditure and therefore try to defer such purchase in times of slowdown.