Risks and risk management

Risks and risk management

The Board of Directors regularly reviews risk management systems, controls and policies

The main purpose of the review is to ensure that risks potentially critical to the Group’s ability to achieve the set targets are identified and hedged.

Like the rest of the Group, the general management of the risk area is based on the principles of the fundamental management structure, which is described in the section on corporate governance. Daily follow-up and management of risks are based on a structure of internal policies, concepts and procedures.

At North Media, risks are divided into six levels and illustrated as follows:

Control and risk management - presentation of financial statements
Financial risks

Operational risks

Market risks

Mega trends

Political risks
Easy to affect
Difficult to affect
In an open and well-developed society, private suppliers of goods and services compete against each other to provide the best and least expensive services to consumers. This competition for consumers represents the very precondition for goods and services continuously being developed in accordance with the consumers’ needs and wishes and being sold at a fair price.

North Media considers political decisions and initiatives to pose risks that are greater than any risk private businesses may inflict on the Group.
With its laws, provisions and regulations, the Danish State imposes competition on FK Distribution, in a large number of areas, by, in the eyes of North Media A/S, giving preferential treatment to the Danish postal service, the main shareholder of which is the State.

Thanks to VAT exemption and government-backed media subsidy to publishers of dailies and free newspapers, North Media Aviser is subjected to taxpayer-funded competion. North Media Aviser’s free newspapers is not exempted from VAT and does not receive media subsidy.

North Media makes a targeted effort to assist in politicians making their decisions on a well-documented and informed basis and having the necessary insight into factors affecting and of interest to North Media’s stakeholders.

Mega trends have a long incubation period and materialise gradually without any actual ending.

Mega trends in North Media’s business areas include Developments and trends, which on a global and national scale determine the direction of how and in which media businesses choose to advertise and communicate with their existing and potential customers.

North Media’s print media such as printed advertisements and newspapers are gradually supplemented and replaced by digital media in the long run. The mega trends in advertising point towards more and more types of media, each serving their own needs and purposes. In the job ad market, however, the migration from print to online has largely already taken place.

North Media wants to be at the cutting edge of this Development and therefore works actively with product Development for the more traditional print activities as well as the newer online activities and on linking up the two media in order to achieve increased utility value for both advertisers and consumers.

The implementation and current development of the No-Ads+, minetilbud.dk and BEKEY are some examples of this.

Market risks affect all market participants in the markets, in which North Media operates. North Media considers market risk to be relevant now and within the next one to two years. Like other private companies, North Media is affected by macroeconomic developments.
Both FK Distribution and North Media Aviser are highvolume businesses subject to high marginal contribution margins. This entails that, in the short run, earnings are sensitive to fluctuations in volume as the production capacity cannot be adjusted at short notice.

FK Distribution’s contract portfolio is composed of one- and two-year contracts, which as a main rule follow the calendar year.

Newsprint is an important raw material in the production of newspapers. Thanks to the Group’s membership of Pressens Fællesindkøb, it may buy newsprint at the same favourable prices as those offered to other dailies and free newspapers in Denmark. Therefore, the market risk involved in newsprint is limited.

North Media Aviser prints its newspapers in a narrow time window. Through long-term printing contracts, attempts are made to ensure that printing prices are always competitive, and that any changes in printing prices can be adjusted through advertisement prices.

The business model for some of North Media Online’s areas is subject to uncertainty with respect to the new and immature markets of operation. North Media Works continuously on various models to ensure satisfactory earnings.

For BEKEY, the business model is subject to uncertainty too, and the electronic access control market for buildings is very new. As BEKEY’s business model includes hardware in the form of physical products with long periods of development and production and a long lead time, market developments may constitute a risk as it takes longer to carry through product changes than is the case for online products, for instance.

North Media defines operational risks as risks associated with day-to-day operations such as IT systems or fire at terminals or office buildings. The most material risks relate to FK Distribution, which could have a significant impact on the Group’s financial performance in the event of lengthy breakdowns.

In the distribution market, high quality is an important competitive parameter. FK Distribution’s distribution terminals in Taastrup and Tilst are of great importance to continuous quality improvement. Sorting systems pack the printed matter in household sets by route with a very low number of errors per thousand, and the distribution quality is ensured through training and test calls. FK Distribution co-operates closely with selected customers on an ongoing basis to continuously improve quality.

North Media Aviser would only to a lesser degree be affected by IT downtime as production can be moved swiftly to other servers. In the event of a breakdown in one printing house, the printing of the newspaper could swiftly be redirected to other printing houses as there is spare capacity in the printing market. The quality of the newspapers is managed via internal control procedures in the editorial and pre-press-related processes, while the print quality is described in performance specifications for external printing houses.

North Media Online would be directly affected by any IT downtime, but it is estimated that activities are readily restorable by moving to other servers or reinstalling programs.

BEKEY has suppliers in Denmark and China. BEKEY is careful in choosing suppliers, for example, by assessing a supplier’s management of operational risks. However, having external suppliers is subject to operational risks over which BEKEY does not have full control. BEKEY strives to mitigate these risks by having products in stock which will ensure security of supply to some degree, but will on the other hand also increase the risk of some products becoming obsolete before they are sold because the market is developing so rapidly.

IT operations for North Media Aviser and parts of North Media Online in Søborg, meaning most of the servers and other IT equipment, have been outsourced to KMD A/S. IT operations for FK Distribution, North Media Online activities in Aarhus and some of those in Søborg as well as at BEKEY are handled by own in-house staff and equipment. In 2016, a process has been initiated to combine large parts of IT operating activities with FK Distribution’s IT department in Taastrup, which will improve efficiency and align Work processes and procedures.

All systems are protected by access controls, which limit the access to functions needed by the individual employee. In addition, daily updates are performed of firewall, spam filters and anti-virus programs, and emails are scanned for high-risk contents. North Media regularly updates the Group’s procedures for this area, including the Group’s IT security policy, IT risk analysis and IT security test.

In the insurance policy, the Board of Directors has laid down guidelines for the protection of the Group’s assets and earnings as well as for risk prevention work and provided an overview of imminent financial risks and consequences. In addition, it is the Executive Board’s and the Board of Directors’ opinion that the Group is appropriately insured in terms of insurable risks and own risks.

North Media’s most significant financial risk is related to the portfolio of external securities.

At 31 December 2016, the portfolio of shares stood at DKK 214.8 million. The portfolio accounts for 79% of the total cash resources.

It is considered a key strategic strength for North Media to have strong cash resources. To raise the return on capital, some of the cash resources have been invested in external blue-chip Danish and foreign shares and investment funds.

In recent years, North Media has had a high positive return on securities. However, historically realised returns are no guarantee of future returns. North Media pursues a longterm buy-and-hold investment strategy, although the portfolio will be rebalanced at appropriate intervals. This is why
the value of the porfolio of securities may fluctuate heavily both in the shortterm and the longterm in connection with the general fluctuations in the share markets. The section on capital structure on page 34 contains a list of the most significant shares held in the portfolio at 31 December
2016.

Furthermore, North Media defines interest rate, liquidity, credit and currency risks as financial risks. North Media has implemented a finance policy, which regulates the general frameworks for managing the Group’s
exposure to, for example, currency and interest-rate movements. The policy lays down hedging guidelines. Where financial hedging or other instruments are used, hedging is done for the sole purpose of reducing commercial risks.

Interest-rate risks
It is the Group’s policy to hedge the interest-rate risks on its long-term loans when interest payments are deemed hedgeable at a satisfactory level.

Liquidity risks
The Group upholds liquidity management to ensure that adequate and flexible financial resources exist at all times. The risk of the liquidity situation suddenly and unexpectedly developing adversely and affecting the Group’s Investment and operational liquidity requirements is handled
through a number of management tools. The planning of anticipated liquidity requirements is carried out in connection with the preparation of budgets and action plans. The liquidity requirements are monitored on a daily and monthly basis.

It is the Group’s objective to have sufficient cash resources to continuously make appropriate arrangements in case of unforeseen changes in the drain on liquidity. The Group’s cash pool is monitored daily in order to optimise interest received and interest paid on the Group’s total cash flows. It is Group policy to be self-sustaining, however, the Group’s properties are financed by way of long-term loans.

Credit risks
North Media is exposed to credit risks from receivables and deposits with banks. The maximum credit risk equals the carrying amount.

North Media’s policy is to do business only with banks enjoying high credit ratings. Losses on receivables will always constitute a risk, but the risk of loss on a customer is weighted against the earnings potential on an ongoing basis. The Group’s bad debt loss has historically been limited in size. Credit insurance has been taken out against a portion of the Group’s trade receivables at 31 December 2016.

Exchange-rate risks
Newsprint is purchased via Pressens Fællesindkøb, whose prices depend on fluctuations in SEK and NOK. Consequently, the Group has an indirect exchange-rate risk towards Swedish and Norwegian kroner. In addition, the Group is subject to an exchange-rate risk in relation to Investments in foreign shares.

Capital management
The Group regularly considers whether or not to adjust the capital structure in order to weigh the increase in the required rate of return on equity against the increasing uncertainty associated with loan capital.

It is Group policy to distribute dividend in so far as such distribution is considered reasonable, given the existing general capital structure, liquidity and estimated future earnings.

Detailed internal control and risk management systems have been established in connection with the Financial reporting process. The aim is to ensure that internal and external financial reports give a true and fair view free from material misstatement. Furthermore, the systems are to ensure that the external interim management statements, interim reports and annual reports of the Group are presented in accordance with IFRS as adopted by the EU as well as additional Danish disclosure requirements for the presentation of financial statements of listed companies.

North Media is regularly reviewing its risks and internal control for the processes related to key financial statement items. In this context, current processes have been mapped, and future goals been established based on a maturity scale. The Group is continuing its work on optimising
internal controls. In 2016, the work continued to implement a new IT system to manage and monitor the Group’s risks and internal control.