Risks

NKT is continuously working to identify, analyze and manage all material risks with a view to Group optimization for the benefit of stakeholders.

NKT is equipped with risk management tools in the form of policies and procedures. The general aim is to avoid, hedge and manage risks while at the same exploiting the opportunities provided by changes in the risk picture.

The assessment of risk probability is not an absolute measure but an opinion of the relative likelihood of their occurrence, and of their occurrence in the individual business segments. This is the Management's subjective assessment and it is included to provide insight into Management?s view of the situation.

In the assessment of risk factors, gain possibilities are considered on an equal par with loss probabilities. The effect of an economic cyclical improvement would therefore be greatest for Nilfisk-Advance and for NKT Cables' low voltage market.

Compared to Management's assessment of the risk factors in the 2008 annual report, the assessment for Photonics Group with regard to cyclical sensitivity and commercial factors has changed from lowest exposure (one star) to medium exposure (two stars).

As well as market competition, 'commercial factors' include relationship to suppliers etc. These risks are further stated in the individual company reviews.

In addition to the risk factors in the company reviews NKT is exposed to a number of more general risks described below. The description of risks here and in the company reviews is not exhaustive and the risks are not listed in order of priority.

IT risks

NKT makes extensive use of IT and is therefore exposed to operational disruption and security issues. This may result in operating and financial losses and loss of reputation. NKT maintains ongoing focus on IT security in order to uphold continuing high levels.

Tax risks

NKT is subject to the tax and excise legislation of the countries in which it operates, and changes in such legislation in these countries may affect NKT's position in this regard. NKT is involved in major transactions in many countries and its tax and excise position is therefore exposed to challenge from local tax authorities. NKT has consequently covered the most significant risks and prepared associated documentation.

Legal risks

NKT continuously monitors developments in legislation and regulations and adopts a structured approach to ensure compliance. NKT is frequently signatory to agreements, including agreements relating to operations and strategic issues. These contracts imply opportunities, but also risks which are assessed and covered at time of contract signature.

Insurance risks

NKT establishes statutory insurance cover and such other insurance cover as is deemed relevant and customary in the sectors and in the countries in which it operates. NKT reviews its insurance policies at regular intervals with an insurance specialist.

Financial risks

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

Investments and acquisitions

As part of NKT's strategy, opportunities for acquisitions and for investing in production plant etc. are regularly assessed. Acquisitions and major investments in production plant imply a number of risks in relation to both the investment process itself and the investment's subsequent integration into NKT's business. These risks are assessed and covered as effectively as possible.

Ethical standards

In step with increased awareness among NKT's stakeholders with regard to human and employee rights, anti-corruption and environmental protection, activities related to corporate social responsibility are increasingly influencing NKT's potential for sales, attracting qualified personnel, and so on. Dealing with such risks is further discussed in the section 'Corporate Social Responsibility'.

NKT Cables - risks

Operating risks

NKT Cables is a significant player in a competitive and mature European industry. Both the competitiveness and profitability of the company are directly related to its ability to manufacture quality products at acceptable unit costs and to establish close interplay with customers.

The key to this is critical mass, meaning that NKT Cables needs to manufacture its individual product categories in series large enough to be supplied at attractive prices. Provided manufacture is based on optimal product formulas, efficient raw materials procurement, efficient logistics and low sales and administrative costs, NKT Cables will essentially be able to offer its products at competitive prices, which will also mean increased sales, increased market shares and increased earnings.

Against this background, NKT Cables has given strong focus in recent years to adjusting its costs and product range, exploiting cross-sales, establishing growth in new markets - and also on optimizing interplay with customers.

Metals - primarily copper and aluminium - are the company's most important production raw material and represent on average more than 50% of the sales 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 limited as these changes are reflected relatively quickly in sales prices. However, major price fluctuations may impact on earnings through inventory adjustments. High and medium voltage prices are usually determined contractually, while in the low voltage segment price lists are used which are covered during their validity period by various hedging contracts.

Financial risks

Around 54% of the revenue of NKT Cables is achieved on sales in the EUR zone, including Denmark, 22% on sales to Eastern Europe and 14% on sales to China, while around 10% derives from other markets. Currency sensitivity primarily relates to monetary developments in Poland, Czech Republic, UK, Sweden and China, and to price development in USD-based metals.

Please refer also to Note 30 to the consolidated financial statements, 'Financial risks and financial instruments', which besides describing currency risks also refers to risks relating to interest rates, credit, liquidity and raw materials.

Cyclical sensitivity

Approaching half of NKT Cables' revenue, principally that part of revenue which relates to low voltage products for the building industry, is considered very sensitive to cyclical developments.

NKT's remaining revenue, relating to submarine cables, high and medium voltage cables, 1 kV cables and accessories, derives mainly from energy sector sales. This sector is normally considered less cyclically sensitive, sector activity primarily being driven by grid maintenance requirements, grid expansion due to increased power consumption, and above all grid upgrade resulting from increased focus on improved system reliability and use of renewable energy. In the light of the current economic outlook, however, these segments too may be affected by slowdown and delays.

Nilfisk-Advance - risks

Commercial risks

To consistently remain among the major suppliers of professional cleaning equipment it is vital for Nilfisk-Advance to have a range of products that can compete successfully with rivals. New quality products featuring enhanced productivity, reliability and ergonomics and combining environmental focus with reduced operating costs are therefore launched on a regular basis.

Nilfisk-Advance also focuses on constant improvements to its business systems through efficiencies in production, sales, administration and distribution.

Financial risks

With approx. 25% of its revenue in the US market, Nilfisk-Advance is exposed to US dollar developments, exposure relating primarily to translation risk. A +/-5% movement in the US dollar will increase/reduce the revenue of Nilfisk-Advance by approx. +/-60 mDKK and profit before tax (EBT) by approx. +/-4 mDKK.

Please refer also to the consolidated financial statements, Note 30 'Financial risks and financial instruments'.

Cyclical sensitivity

Nilfisk-Advance is cyclically sensitive. This is because most end customers are pro-fessional or institutional users for whom buying cleaning equipment is a capital investment. In times of recession, new investment is traditionally postponed in order to optimize and protect company liquidity.

NKT Photonics Group - risks

Commercial risks

The success of Photonics Group companies depends on their ability to create groundbreaking products for demanding and predominantly global, niche-type markets. The ability to attract innovative and well-qualified people and establish constructive interplay between technological and commercial drivers is therefore crucial to company success.

Financial risks

As international market players, the Photonics Group companies are exposed to currency risks.

Cyclical sensitivity

At their present stage of development the Photonics Group companies are considered cyclically medium-sensitive. While it lasts, the economic recession is predominantly expected to influence the sales of LIOS Technology and Vytran but it is also delaying breakthrough for NKT Photonics products, particularly in the semiconductor industry. Relative to the NKT Group as a whole, the cyclical sensitivity of the Photonics Group companies is currently negligible.

NKT Flexibles - risks

Commercial risks

The foremost commercial risk relates to the level of oil industry activity, and thus the size of the offshore market in a given period. This activity level is partly linked to the current price level for crude oil and the expected future price level and strongly influences willingness to invest.

The relative competitiveness of the three leading suppliers of flexible pipes depends on their ability to design pipes that match the customer's needs in terms of quality and specifications and also delivers the most cost-effective solution in terms of product life.

Financial risks

As an international market player NKT Flexibles is exposed to currency risks. As a general rule the company hedges its currency risks wherever possible.

Cyclical sensitivity

NKT Flexibles rates moderate on cyclical sensitivity. The company forms part of the value chain for the global offshore industry, and the need for the company's products is primarily determined by the expansion of existing oil fields or establishment of new ones. The offshore industry operates with a long planning horizon and investment decisions are primarily driven by developments in oil prices and the size and composition of oil reserves.