Commercial and financial risks
The key geographical market area for our activities is Northern Europe which is characterised by economic and political stability.
Results and equity can be affected by a number of commercial and financial risks that impact Solar’s activities.
Solar has prepared policies in substantial areas. The policies have been reviewed by Internal Audit and approved by the Supervisory Board.
The sections below set out a number of known risk factors that are considered to have a potential impact on the results and balance sheet.
Commercial risks
Solar’s business is wholesale and distribution of electrical, plumbing and ventilation components for buildings, plant and production. The group has many years of experience in assessing and handling risks relating to this business area. No resources are channelled into other business areas or speculative or opportunistic measures.
Sensitivity to economic trends
As an international business, Solar is affected by global as well as local economic trends. In recent years, however, our group’s business platform has been significantly expanded, thus, reducing our exposure to economic trends in the construction industry. The extension of the product range within, for instance, Offshore/Marine, Telecommunications and Security as well as Industry, therefore, means that the group’s development increasingly follows general economic trends.
Customers
The customer portfolio means that Solar can withstand any loss of individual customers. Revenue from the largest customer, therefore, represents no more than 2% of the group’s total revenue.
Suppliers
As many of Solar’s suppliers are complementary, the group only depends on individual suppliers to a limited extent.
IT
Solar’s activities are increasingly based on IT solutions and are, therefore, exposed to operational disruption. This can result in operational and financial losses as well as a loss of image. Most of the hardware is located at the corporate IT department and at another location which offers a complete operational mirror of the installation.
Most of the applied software has been developed in-house and substantial resources are spent on quality assurance of software. Parts of the group’s in-house developed ERP system will be replaced by Solar 8000 (SAP), which will provide better support for our business activities.
Insurance
Solar seeks to minimise the impact of unpredictable events on the group’s financial results through insurance programmes.
We have taken out policies that are considered to be relevant and usual for the sector and for companies of Solar’s size. We continually assess insurance-related matters in respect of buildings, moveables, operating loss, transport as well as commercial and product responsibility to ensure that current policies are in keeping with Solar’s insurance policies. Excess is not considered to exceed usual practice for the sector or for companies of Solar’s size. There is no guarantee, however, that all risks have been assessed correctly or that there is sufficient insurance cover for all potential risks to which the Solar Group may be exposed.
Financial risks
Results and equity are affected by a range of financial risks. Financial instruments are solely used for hedging of commercial and financial risks. All financial transactions are based on commercial activities and no speculative transactions are made.
Currency risks
As other international companies, Solar is exposed to currency risks in the form of conversion risks since a substantial proportion of revenue derives from enterprises outside the euro zone. The currencies used are euro, Danish kroner, Swedish kroner, Norwegian kroner and, to a lesser extent, Polish zloty.
The individual subsidiaries are not significantly affected by exchange rate fluctuations since revenue and costs in subsidiaries are in the same currencies. Solar has a number of investments in foreign subsidiaries where the translation of equity to euro depends on the exchange rate.
Investments in subsidiaries are usually not hedged as such investments are regarded as long-term and because hedging is seen as unlikely to create any long-term value.
Interest rate risks
Ongoing monitoring and adjustment of interest-bearing liabilities is carried out. Loans are only raised in the currency of the countries in which Solar operates. Of total interest-bearing liabilities, Solar endeavours to ensure that a maximum of half is based on variable interest fixed in accordance with current money market rates. The remaining interest-bearing liabilities are fixed-rate.
The Solar Group has no significant non-current interest-bearing assets. Solar’s main banker has made no covenant requirement in relation to interest-bearing liabilities. As a result of Solar’s policies, a certain interest rate risk exists, which means that any change to the interest rates will affect the results.
Liquidity risks
Solar has a target of substantial self-financing to ensure independence from lenders and thus greater freedom of action. Financial management is controlled centrally, based on the individual subsidiary’s operating and investment cash requirements. It is ensured that there are always sufficient and flexible cash reserves and diversification of maturities of both long and short-term credit facilities.
Credit risk
Solar is subject to credit risk in respect of trade receivables and cash at bank. The maximum credit risk equates to the carrying value. No credit risk is deemed to exist in respect of cash as the counterparts are banks with good credit ratings. As a result of customer diversification, trade receivables are distributed so that the risk is not assessed as unusual. Credit granting to customers is regarded as a natural and important element in Solar’s business operations. Solar conducts efficient credit management at all times. Solar Polska Sp. z o.o. generally takes out insurance to hedge against loss to the extent possible. In 2009, we saw credit insurance businesses denounce a high number of policies on customers. Loss on trade receivables is a normal business risk and, therefore, it will occur.
Solar A/S’ main banker is Nordea Bank Danmark A/S.
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