In its business policy, the CEWE Group aims to secure the company’s future as a going concern and to achieve lasting growth in its enterprise value. In support of this goal, CEWE’s activities throughout Europe entail a permanent and conscientious process of weighing up risks and opportunities. Taking opportunities and the ability to identify and analyse risks and to reduce them through suitable strategies are key aspects of its corporate activities. The Board of Management is continu-ously responsible for systematic management of risks and opportuni-ties, which is a management task in each of its areas of responsibility.
Management’s overall assessment of risks and opportunities The overall level of risk is assessed through the company’s opportuni-ties and risk management system, in combination with its planning, management and control systems. Individual risks and opportunities are assigned to three different categories on the basis of the gross method: low level (less than 0.5 million euros), medium level (0.5 mil-lion euros to 2.0 mil(0.5 mil-lion euros) and significant risks and opportunities (more than 2.0 million euros).
As of December 31, 2014 no serious risks apply. At the present time, individual risks – or risks arising in conjunction with others – are un-likely to impair the net assets, financial position and results of opera-tions of the CEWE Group in a manner which jeopardises its existence.
The company sees slight opportunities in the form of turnover growth in the areas of Photofinishing, Retail and Printing, and medium-level opportunities in relation to tax recovery claims in a legal dispute with the tax authorities.
In organisational terms, CEWE has fulfilled all of the necessary re-quirements for early identification of possible risks and opportunities.
The CEWE Group’s risks and opportunities management systems are closely integrated. The following section initially sets out the risk categories listed within the scope of its risk management system:
Strategic risks
In response to the changing nature of mobile devices and the grow-ing importance of the Internet as an ordergrow-ing channel, CEWE has reinforced its programming and development capacities in this area.
By concentrating its development activities in-house, CEWE is seeking to widen its lead over the competition. CEWE is seeking to respond to declining Retail turnover in the area of hardware (camera sales) by means of new web shops. Due to a further decline in camera sales beyond the expected level, medium-level risks of a decline in Retail turnover now apply, particularly for Fotojoker, Poland.
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Operating risks
The market for films and analogue photos now accounts for less than 3 % of total turnover and continues to decline. The large volume of digital cameras has not resulted in an increase in the printing volume for digital photos, since many digital photos are kept on hard drives and are not printed out on photographic paper. With its product CEWE PHOTOBOOK and other value-added products such as CEWE CALENDARS, CEWE CARDS and CEWE WALL ART, the CEWE Group expects to achieve a further increase in its printing volume for these products. CEWE’s immediate printing volume at the POS has also increased. In the Internet, as of the end of the year the company had once again increased its volume of calendars and cards – nonetheless, in principle there is a risk here of declining turnover.
As well as the volume trend, the price trend is also key for the com-pany’s success. CEWE’s brand product CEWE PHOTOBOOK and the outstanding quality which this offers, the company’s leading order-ing assistant software package and its continuously expanded prod-uct range are the keys to success here. CEWE continues to work on improving the turnover generated by each CEWE PHOTOBOOK with high-gloss finishing, larger formats and more pages per book. In the analogue field, prices will be adjusted due to falling volumes, increased production expenses and higher photographic paper costs.
CEWE is also well placed in its growth field of Online Printing, with CEWE PRINT, Saxoprint and viaprinto. As outlined in the “Online Printing segment” section, this business segment is enjoying strong growth; we see more opportunities than risks here.
In regard to our suppliers of photographic paper, volumes have been consolidated with one main supplier and safeguarded through a long-term contract; however, alternative suppliers are also present on the market. There are also other attractive providers of paper for digital printing. The risks on the supply side are therefore seen as slight.
The purchasing risk for investment goods and photography bags has been reduced through new suppliers and a risk-oriented selection of suppliers. In general, alternative suppliers for strategic articles have been established in view of risk considerations.
The significance of major customers continues to rise due to increasing concentration within the Retail segment. The fact that CEWE’s five largest customers account for a turnover share of less than 39 % with their individual distribution channels should be positively emphasised by comparison with other companies. Nonetheless, a medium-level risk still applies in relation to the loss of major customers. This is offset by an increasing share of direct business with consumers in several of CEWE’s markets.
In the area of environmental risk, which is regularly monitored by means of internal checks at all of the company’s production plants, once again no violations of environmental standards were reported in 2014; this risk is classified as low.
The CEWE Group depends on a large number of IT systems. The on-going integration of IT systems in the company’s business processes enhances the status of IT. Dependency on the availability and quality of data poses a medium level of risk potential. The non-availability of commercial or technical IT systems and applications may directly affect production or the company’s logistics department. To minimise these risks, the CEWE Group has stable and generally redundant IT systems for specific users, back-up procedures, virus and access pro-tection systems, encryption systems and integrated IT infrastructures and applications which are standardised through the Group. In the past financial year, the Group’s commercial and technical IT systems were once again audited by external audit firms, to achieve further improvements in IT security and for increased efficiency.
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The skills and commitment of all of our employees are critical to the successful development of the CEWE Group. There is a risk of the company losing good personnel and failing to recruit a sufficient number of specialist staff. To reinforce and strengthen these factors a large number of personnel measures have been implemented, also in response to the process of demographic change. These include an interesting range of initial and advanced training courses, attrac-tive benefits and a performance-oriented remuneration package, as well as our “Balancing family and career needs” project. Human resources activities also focus on support for female employees. For key positions especially, stand-in and succession planning arrange-ments are regularly analysed, so as to appoint new junior executives in good time.
Operational risks resulting from the failure of machinery are seen as very slight, due to back-up facilities at other plants.
Thanks to the support of a large number of transport companies, the logistics risk is seen as limited. On the other hand, the risk of petrol price increases is considered to represent a medium-level risk.
Financial risks
Reporting on the use of financial instruments is integrated within the general report on risks and opportunities, to ensure the uniform presentation of this information.
The management of liquidity, currency and interest rate risks and marketing of silver are handled by the CEWE Group’s Central Ser-vices, in close coordination with the responsible departments of the respective Group companies. The Group’s operating companies are responsible for the management and supervision of default risks; here too, the Group’s Central Services maintain a close dialogue with the affected departments of the Group’s companies.
Liquidity risks resulting from fluctuating cash flows are identified early on within the scope of CEWE’s liquidity planning. The Group’s use of liquid resources is optimised by means of cash pools as well as sup-plementary cash management measures. Due to its solid credit rating and the credit lines which its banks have granted with binding effect, CEWE has access to extensive liquid resources at all times. The organ-isation of external and internal payment transactions and the structure of its credit facilities are tailored to the extremely seasonal nature of its business and the related cash flow. CEWE generally negotiates and concludes new credit agreements with its partner banks in good time prior to the expiry of its old agreements. It thus maintains its extensive credit facilities and secures long-term, staggered terms and covenant agreements in keeping with its solid credit rating.
In terms of its currency risks, exchange rate fluctuations have only a very limited effect on CEWE’s competitiveness and earnings. The overwhelming portion of the Group’s operating business is handled in the euro. Functional currencies of the Group other than the euro account for around one third of its business volume. Almost all of the Group’s foreign currencies relate to local production plants with same-currency cash flows (natural hedge). Nonetheless, a medium-level risk applies for CEWE here.
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Finance-related currency risks apply due to translation at the year-end rate into the functional currency of the respective foreign com-pany for trade receivables and payables and other monetary items within the meaning of IAS 21. Overall, these possible cash risks are of minor significance. More extensive currency risks apply within the scope of measurement for consolidation (translation risks) and are not relevant for cash purposes. In line with this risk structure, CEWE does not use derivative instruments for hedging purposes or only uses them very rarely.
For CEWE, interest rate risks may arise due to potential fluctuations in the market interest rate. In principle, these risks may be significant for all of its assets (impairment tests for customer relationships, technolo-gies and brands as well as goodwill) and debt positions (such as pen-sion commitments and variable-interest rate financial liabilities), with a significant impact on valuations and earnings from the point of view of interest rates. We consider the risk of depreciation for assets to be slight. For the Group’s financial positions, the risks are of very minor significance due to the financing structure and the strong seasonal fluctuations in net financial liabilities. Interest rate fluctuations result-ing from revised credit risk premiums have been reduced through fixed long-term margins as well as CEWE’s solid long-term credit rating. The Group’s solid equity ratio and the medium-term fixed-rate loans which it has drawn down strongly reduce the risk-related variable-interest rate risk segment. Here, the seasonal cash inflow also further minimises risk, since it strongly reduces or even eliminates the Group’s variable financing requirement for roughly half of the year.
During phases in which CEWE’s growing cash position reduces or even eliminates financial liabilities through fully drawn down loans, the interest rate risk thus only refers to the margin between the debit and credit interest rate. Moreover, in the area of interest rate risks on account of the prevailing risk structure derivative instruments are not used for hedging purposes or are only used very rarely.
In the area of film development (analogue photography) and the development of pictures on photographic paper (analogue and digital photography), silver residues are recovered by means of electrolytic procedures. The pure silver which results from this recycling process is sold on the open market. CEWE does not pursue any other raw materials trading or resale transactions. The potential for silver recov-ery is declining, due to the strong decrease in the volume of analogue photography as well as changes in photo products. This is reducing the relevance of the income obtained from sales of silver. Pricing on the market for pure silver is determined by means of a precious metal’s value preservation function as well as its use as an industrial metal. Due to the costs of possible cover transactions and the com-pany’s declared avoidance of speculative measures, derivative instru-ments are not used for hedging purposes or else only used very rarely.
In the area of products and services, receivables relate to commercial third-party customers as well as consumers; other receivables apply in relation to the public sector, employees, insurance firms etc.; at CEWE, potential loss-related impairment is overwhelmingly attribut-able to commercial third-party customers. This risk is reduced by means of continuous monitoring of customers’ credit ratings and payment behaviour in close coordination with the company’s mar-ket-oriented departments and, if possible, covered by means of insur-ance. Moreover, in case of irregularities in customer relationships the volume of business is managed on the basis of individual decisions.
Impairment of consumer receivables is minimised by means of a pro-fessional debt collection management system as well as risk avoidance and information-gathering parameters. The risk for other receivables is managed through close monitoring of individual counterparties.Any individual risks resulting are taken into consideration by means of suf-ficient valuation adjustments, insofar as the realisation of this loss is sufficiently probable, and are thus not included in this assessment.
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Legal risks
Material legal risks include potential violations of legal regulations or internal guidelines. Malicious acts such as theft, fraud, breach of trust, embezzlement and corruption may result in significant material dam-age as well as damdam-age to the company’s imdam-age. CEWE uses various instruments to deal with these risks. These include its corporate gov-ernance system, its internal control system, its internal audit system and its Group controlling function.
Medium-level or significant legal risks from ongoing proceedings or other disputes are not apparent at the present time. Sufficient provi-sion has been made to cover litigation risks resulting from current business transactions by means of appropriate accruals; this will not discussed in any further depth here.
In the event of the theft of customer data and thus non-compliance with applicable data protection legislation, there is a risk of liability claims under civil law, fines, loss of customers and damage to the company’s reputation. No such cases have resulted to date.
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