Oriola-KD's Board of Directors has approved the company's risk management policy in which the risk management operating model, principles, responsibilities and reporting are specified. The Group's risk management seeks to identify, measure and manage risks that may threaten Oriola-KD's operations and the achievement of goals set. The roles and responsibilities relating to risk management have been determined in the Group.
Risks and uncertainty factors
Oriola-KD's risks are classified as strategic, operational and financial. Risk management is a key element of the strategic process, operational planning and daily decision-making at Oriola-KD.
Oriola-KD has identified the following principal strategic and operational risks in its business:
- Amendments to pharmaceutical market regulations may weaken Oriola-KD’s profitability.
- In the Swedish retail business, the free establishment of pharmacies has led to an increase in the number of pharmacies. The number of pharmacies may continue to grow, which could further increase the fierce competition.
- In the Russian retail business, tough competition resulting from the large number of pharmacies may lead to a further decrease in the gross margin and a rapid turnover rate of key personnel.
- Extra capacity ensuing from a change made in the Swedish wholesale market will intensify competition, which may weaken the profitability of operations. The share of single channel distribution in the pharmaceutical wholesale market may decline rapidly, which may weaken the profitability of operations and lead to the restructuring of wholesale operations.
- As a result of the tough competition in the Russian wholesale business, the gross margin may decline further, which will lead to a continued need to intensify operations and restructure wholesale operations over the long term. The payment behaviour that is typical to the Russian market, combined with the regional expansion of operations may increase credit risks.
- Strategic development projects involve operational risks.
The main financial risks for Oriola-KD involve currency rate, liquidity, interest rate and credit risks. Currency risks are the most significant financial risks in Russia and Sweden as any changes in the value of the Russian ruble and the Swedish krona will have an impact on Oriola-KD’s earnings and equity.
Oriola-KD prepares goodwill impairment testing twice a year, in accordance with the timetable of its strategy and planning process. Changes in cash flow forecasts based on strategic plans, or in the discount rate or perpetuity growth rate, can cause a goodwill write-off, which would weaken Oriola-KD's result. The impairment test on the goodwill of the cash-generating wholesale unit in Russia is particularly sensitive to changes in the discount rate or cash-flow forecasts.
Near-term risks and uncertainty factors
The slowing down in the economic growth of Russia as well as the continuing weakening of the external value of the Russian rubble may have an effect on the profitability of the Oriola-KD Russian businesses in 2014. A decrease in gross margin resulting from intense competition and an increase in credit risks concerning customers may have an impact on the profitability of the wholesale business in Russia.
Oriola-KD’s strategic development projects in the Russian wholesale business and the operations in Sweden involve operational risks which may have an effect on Oriola-KD’s profitability.
Oriola-KD’s long-term financing agreement contains financial covenants concerning the ratio between Oriola- KD's net debt and rolling 12-month EBITDA and the Group’s gearing ratio. Weakening profitability of Oriola- KD’s business operations may affect Oriola-KD's ability to meet the financial covenants contained in the financing agreement.
Risk Management system
The purpose of risk management is to help the Group to achieve its objectives. The risks threatening the achievement of the objectives can only be managed if they are identified and assessed.
The Board of Directors of Oriola-KD Corporation approves the company’s risk management policy and the risk management objectives and guides and supervises the planning and implementation of the risk management. The Board-appointed Audit Committee supervises risk management in the Group.
The management of the Oriola-KD Group has the operative responsibility for risk management. Risk management and the principles governing risk management and their development, coordination and monitoring are the responsibility of the Risk Management Steering Group, which is chaired by the Oriola-KD Group’s CFO.
Oriola-KD’s risk management policies are part of the Group’s management process and its different components. The purpose of the policies is to ensure that risks can be comprehensively identified, assessed, managed and monitored throughout the Group. Risk management is an integral part of Oriola-KD’s planning and management system, decision-making, daily management, monitoring and reporting.
The principle governing the risk management policy is illustrated above. The risks that may interfere with the achievement of the objectives in the sector in question are identified and assessed as part of business operations planning. Risk management is also an integral part of the Group strategy process.
The first steps in the risk management process are:
- Risk identification
- Evaluation of the likelihood of the risks occurring if the risks are not accounted for
- Evaluation of the consequences of the risks occurring, by calculating the cumulative financial losses during the strategy period
- Preparation of a risk management plan (measures helping to avoid risks, to make them less likely or to mitigate the consequences)
- Risk management is incorporated into the monitoring reports regularly submitted to the management
The Group Management Team and the Board of Directors receive yearly reports on the risk management situation.