Risk and Risk Management

All business operations must manage uncertainty regarding future events that could affect the operations positively, bringing opportunities to generate increased value, or negatively, incurring a risk that targets will not be reached, with reduced value being generated for shareholders and other stakeholders as a consequence. Consequently, risk management is an important element in the governance and control of the operations.

Midsona is affected by the general economic situation, currency exchange fluctuations and other company-specific external factors. This section details the most significant risks affecting the capacity to achieve set operational and financial targets for the Group, as well as the management of each risk. Midsona actively seeks to minimise risks through preventive efforts and, where this is not possible, to hedge or insure against the risk in as cost-effective and balanced a manner as possible, with well- considered risk taking within set limits.

Risk management is governed at an overarching level by the Board of Directors and the Audit Committee, as well as at an operational level by the CEO, management team and other employees.

For more information about Risk Management, see Annual Report 2016 pages 42-46.

Operational risks

Product responsibility

Handling foods imposes rigorous demands on traceability, hygiene and handling. Poor control can lead to contamination, allergic reactions or various kinds of injuries. Deficiencies in food handling could lead to confidence in Midsona and its brands decreasing and defective products having to be recalled or repurchased. Recalls can be costly and damage the Group’s reputation while preventing inventories from being sold. Midsona could also be subject to product responsibility demands if its products are claimed to have caused personal injury.

Production

Midsona has a production facility in Denmark for the production of organic foods and bodycare products. The production unit is certified for organic production. The risk is purely in terms of the production technology. That is to say, an unplanned interruption to production could directly affect deliveries to customers, since a large part of production is conducted to order.

Prices for raw material

Trends in prices for raw materials depend largely on supply and demand, which are beyond Midsona’s control. The prices of certain raw materials that Midsona purchases are also affected by agricultural policy decisions, subsidies, trade barriers and activity on commodity exchanges.

Distribution agreement

A considerable proportion of the Group’s sales
of goods derives from distribution agreements, according to which Midsona holds an exclusive right to market, sell and distribute other companies’ products in a defined market. Normally, such distribution agreements extend over a period of one to five years and can, under certain circumstances, be cancelled prematurely if, for example agreed minimum sales volumes cannot be achieved. There is always a risk that Midsona will not manage to extend distribution agreements or enter new distribution agreements with acceptable terms.

Suppliers

Midsona conducts proprietary production of goods and also uses external suppliers, primarily within Europe. Supplier disruptions are a risk for the Group, taking its commitment to customers into account.

Customer dependency and customer credit risk

Midsona has some 300 active customers, of whom the ten largest account for 63 percent (54) of net sales. If Midsona is unable to live up to the demands imposed by its largest customers, and if customers fail to meet their payment obligations, Midsona could be negatively affected.

Competitors - and, at the same time, customers

Customers are primarily pharmacy, FMCG and healthfood retail chains. To a varying extent, these players offer competing products that they sell under their proprietary brands (private label), which are growing stronger each year and that occupy an increasingly large share of the product range on shop shelves. If these players continue to broaden their product ranges under their proprietary brands, this could lead to further competition and increased price pressure, which would affect Midsona’s sales and results negatively.

Renewal of permits, certifications and licences

Midsona conducts activities requiring permits and holds permits that must be renewed at regular intervals. In addition held one Quantity important certifications and licences that must be continually renewed. Operations could be adversely affected in the event that Midsona fails to meet the set requirements in inspections by the authorities or other organisations, with permits, certifications and licences being revoked as a result.

Competence - a critical resource

The operations require both business and product-specific expertise. The Group’s development is affected by the availability of competent and motivated employees, as well as the knowledge, experience and commitment of management and other key individuals. Development could be negatively affected if one or more of these key individuals were to leave the Group or if the Group is unable to recruit and retain qualified employees.

Financial risks

Currency risk - transaction exposure

Consolidated sales of goods take place mainly in currencies SEK, NOK, DKK and EUR, while the goods purchased are mostly denominated in EUR and USD. The net exposure in EUR is considerable because purchases exceed sales.

Financing risk

Financing risk refers to the risk that future capital procurement and refinancing of maturing loans could be difficult or costly.

Liquidity risk

Liquidity risk means the risk that the Group cannot meet its payment obligations as a consequence of inadequate access to cash and equivalents.

Interest risk

Interest rate risk refers to the impact on profits of a change in interest rates. How quickly a change in interest rates affects profits depends on the periods of fixed interest on loans and investments. As the Group is a net borrower and does not invest funds in listed instruments, it is mainly the Group’s interest-bearing liabilities to credit institutions that are exposed to interest rate changes.

Financial credit risk

Financial credit risk refers to the risk of losses if the counterparties with whom the Group has placed cash and equivalents, financial investments or derivative instruments are unable to meet their payment obligations.