Group-wide risk management system
All business activity entails risks which may have an adverse effect on the Company’s ability to achieve its targets. At the same time, entrepreneurial activity means consciously accepting risks to act on opportunities for enhancing enterprise value. If risks are not detected, allowed for and addressed, they may pose a risk to the Company’s successful performance.
The Management Board has implemented a Group-wide system for identifying and managing risks so that management is able to respond to the current risk situation by taking early and appropriate measures. This system ensures that possible risks to the Company’s business performance are reported at an early stage and their extent rendered transparent and that they are in line with the risk-bearing capacity and the risk tolerance defined by the Management Board. Extreme risks, i.e. risks that may have a very severe effect, but which have a very low probability of occurring, are also addressed. In addition to reporting critical market and corporate developments including details of their possible impact on the Company’s results of operations, financial condition and net assets, the risk management system increases general risk awareness on the part of managers and staff, ensuring that risk assessments are incorporated in the decision-making process and precautions are taken at an early stage to mitigate and avert risks.
The risk management system installed at Koenig & Bauer takes into account “dual materiality”. This means that, in addition to identifying and assessing risks that affect earnings, financial condition and net assets (outside-in perspective), the Group-wide risk management system also systematically detects risks that Koenig & Bauer causes, supports or tolerates the environment or the general public (inside-out perspective).
One aspect of Koenig & Bauer’s risk management activities involves identifying opportunities. In contrast to risks, however, we do not record them in the risk management system described below, but document, evaluate and pursue operational and strategic opportunities as part of our cross-group strategy and planning process. A description of our main opportunities can be found further down in the opportunities report.
Established risk management process
Koenig & Bauer’s risk management structure is made up of the central risk coordination unit that reports directly to the Management Board, the risk managers in the companies and business units and the managing directors of the group companies that are included in the scope of risk consolidation. The Management Board controls the risk management system at the Group level and is monitored by the Supervisory Board. The risk management system covers the production units as well as the main sales and service companies. The risk owners at the operating units perform semi-annual local risk inventories and submit corresponding reports. The management of the operating units in question then reviews the reports for any omissions and evaluates the risks.
A bottom-up approach is applied in which possible risks are reported to the responsible executives combined with a top-down approach comprising a list of assumed basic risk defined by the Group. In addition, the owners of the main strategic projects and value-creation processes are responsible for monitoring project and process risks.
In addition to the semi-annual, Group-wide assessment of the risk situation, the Group policy stipulates a duty to report on an ad hoc basis any risks that exceed a defined threshold. In addition, Group Controlling, on behalf of the Management Board, prepares impact analyses based on defined scenarios for current exogenous situations with a potential impact on the order situation, project execution and Group earnings.
The Group’s risk management policy documents the tools, processes, relevant factors, reporting channels and risk categories. The Koenig & Bauer Group’s risk management system is based on the provisions of German company law and the German Accounting Standards as well as the principles and models of the Institute of Internal Auditors (IAA) and the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Systematic handling of risks creates high transparency for pre-emptive, goal-oriented action
For the purposes of more accurate coordination of risks as well as risk-avoidance and mitigation measures, risk is calculated as a negative deviation from an expected figure. This approach systematically tracks risks that are already included in corporate planning as well as additional latent risks that are not accounted for.
Due allowance is made for the risk mitigation precautions already established, after which net risk is quantified according to probability and potential impact on Group earnings on the basis of clearly described scenarios. The underlying assessment period extends to the end of the year following the reporting year. A standardised approach is applied to achieve a systematic and uniform evaluation of risks. Quantitative or qualitative risks which either individually or together with other similar risks exceed a value of €0.5m and a probability of 10% are reported to the Management Board. These risks are aggregated in risk groups according to the following matrix and classified as low, moderate or significant on the basis of the combination of two dimensions “Impact on Group earnings” and “Probability”. Particular attention is paid to risks with a high or very high impact on Group earnings or with a possible or high probability. Furthermore, risks that may have a very high impact on the Group’s earnings (extreme risks) but exhibit a comparatively low probability are also analysed in qualitative terms in the risk management process and any necessary measures defined on this basis.
The risk management system is supplemented with monthly Group reports as well as the established and additionally enhanced operational management elements. You can find further information on this in the section on planning, management and control in the chapter entitled “Basis of the Group”.
The risk early detection system pursuant to section 91 (2) of the German Stock Corporation Act installed as part of the risk management system by the Management Board is reviewed annually by the external auditor in accordance with statutory requirements for adequacy and implementation and discussed regularly by the Supervisory Board’s Audit Committee. Internal auditing oversees the reporting process and checks it for plausibility.
Description of risks
The following section describes the material risks to which the Group is exposed. In the absence of any indication to the contrary, they are equally relevant for all segments. For the purposes of Group reporting, individual risks are aggregated in risk groups, which in turn are divided into the following categories: business risks, financial risks, operational risks and other risks. The order in which the risk groups are described within the categories reflects the risk assessment per risk group calculated on the basis of the individual risks. Risks with a higher risk assessment precede those with a lower risk assessment. The risk assessment is based on the combination of the two dimensions “Impact on Group earnings” and “Probability”.
General economy and industrial risks
Our business is influenced by underlying conditions in the global economy. Economic activity and growth in our sell-side markets, changes in the value of the euro against other major currencies and interest rates on borrowings may adversely impact sales of our products and our capacity utilisation, while also impairing our forecasts and budgets. Uncertainties also arise from long-term transformation processes in the population with possibly significant effects on the economy and society. Risks are increasingly arising from the stricter climate policies, the heavy debt loads in many economies and the persistent geopolitical tensions. The currently perceptible deterioration in international trade relations and protectionist tendencies in some countries may particularly lead to trade restrictions. This may have an impact on exports of the German economy, which is traditionally dependent on international trade.
In particular, we currently anticipate risks to the macroeconomic environment in the event of continued global inflation, resulting in countervailing monetary policy measures such as increased interest rates, which would make it more difficult for our customers to raise finance. Moreover, continuing uncertainty in the energy markets as a result of the Russian war against Ukraine could have a negative impact on the economy and investment. We see moderate risks to the Koenig & Bauer Group’s future business performance on the basis of the macroeconomic assumptions underlying our forecasts.
To address these risks, we are continuing the P24x efficiency programme, which is described in greater detail elsewhere in this annual report, to enhance our operating profitability and long-term competitiveness. At the same time, we regularly review our Company’s strategic orientation. With the “Exceeding Print” corporate strategy, we are responding to global megatrends and resolutely continuing on the path we have already adopted towards greater digitisation, sustainability and modularity.
We are mitigating sales risks arising from regional fluctuation in demand by steadily optimising our international sales and service network in the markets of the future.
Industry conditions may exert strain on demand for our products and services as well as our business performance. Changing ordering practices on the part of our customers or innovations or repositioning by competitors may impact the performance of individual business segments to varying degrees.
The customer structure, which is dominated by government bodies tied by mostly political decisions, limits forward visibility in security printing business, something that gives rise to corresponding capacity and financial risks. Despite the moderate growth expected in global banknote production over the next few years, our large share of the market limits the scope for any increase in revenue from printing presses.
Our competitors often grant considerable price concessions on sheetfed offset presses and in the security printing segment, which may impede sales of our own products and acceptance of the price increases that we have imposed in the last few months in response to higher inflation rates. We consider this practice to be problematic if it means that our peers are unable to cover their own production costs as a result. We reject such practices as we see long-term disadvantages for innovativeness in the sector. At the same time, such conduct makes it more difficult for us to achieve the targets we have defined for order intake and project profitability. We pursue a strategy of boosting the Group’s competitiveness and profitability on a sustained basis by offering customers bespoke solutions and by simultaneously continuing to optimise structures and production costs. By actively presenting and communicating the technical advantages of our products and services for customers, we are able to secure reasonable premiums on our prices. At the same time, clear sales targets and ongoing checks support efforts to ensure sustainable pricing for new and used presses.
In summary, we consider the sector risks to be moderate in the light of the measures that have already been taken to address them. The risk assessment has thus improved by one category compared to last year’s report. With our diversified product range, which targets different industries, we are able to compensate for exposure to risks in individual industries across the Group. We consider one main task to encompass efforts to continue aligning our range to these new markets of the future of relevance for us by means of new products and applications.
Changing location-based factors such as infrastructure, environmental regulations and taxes or due to political decisions such as legislative or regulatory changes can render our business activities more difficult, expensive or impossible. By observing the business environment and taking pre-emptive action, such as adapting our internal processes, products and purchasing and manufacturing strategies in good time, we can currently mitigate these risks.
Credit and country risks
We monitor credit risks particularly closely. Against the backdrop of further interest rate hikes in response to inflation or the possible aftermath of the Covid-19 pandemic, it is conceivable that there will be an increasing number of insolvencies and payment disruptions which are not yet apparent today due to the availability of development loans and loan-repayment holidays. In addition, the high volume of individual projects with government contractors may yield risks for Koenig & Bauer, particularly in security printing business.
Many printing companies face considerable obstacles in obtaining credit-based finance for capital spending projects as loans are only granted subject to a relatively high risk premium in this sector. In line with customary market practice, Koenig & Bauer must therefore offer sales finance to assist customers in the Sheetfed segment in particular in funding their capital spending projects. In these cases we work, for example, with banks or leasing companies with which we agree on customer-specific risk participation on a case-by-case basis.
We perform credit checks of our customers as well as credit-worthiness reviews in the event of any financing risks. Standard measures for addressing possible payment default risks include government export credit insurance as well as requests for predelivery collateral. After delivery, we retain the ownership rights pending full payment. Proactive receivables management ensures an appropriate response to counterparty and country risks. Sufficient impairments and provisions have been recognised to cover potential defaults, buyback obligations and the recovery of used presses. There is no customer or regional clustering of credit risks. Management receives regular breakdowns of receivables by maturity and region. In this way, it is possible to detect any risk concentration at an early stage and to take suitable precautions. In view of the measures that have been taken and expected market trends, we consider this risk to be moderate.
Risks from measurement of assets and liabilities
Management has discretionary powers in the application of accounting policies. Future developments must be estimated if no market prices are available for the measurement of assets and liabilities. This fundamentally results in the risk of remeasurements becoming necessary in subsequent financial years. This applies, for example, to provisions for retirement benefits, which are measured on the basis of underlying interest rates. Due to the high volume of goods and services exchanged within the Group, risks may arise from the determination of taxable profits in the event of a subsequent correction to intra-Group transfer prices by the tax authorities despite the reliance on worldwide tax advice and close cooperation with the responsible tax authorities. We generally see low risk potential here.
Interest and exchange rate risks
Exchange-rate fluctuations and interest-rate changes may expose the Koenig & Bauer Group to financial risks. Koenig & Bauer holds financial instruments whose fair value and the resultant cash flows are influenced by market interest rates. In selected cases, we make use of derivative financial instruments to hedge or eliminate any risks. The notes to the consolidated financial statements set out the type, extent and market value of the financial instruments used. On the basis of the loan agreements entered into, we currently consider interest and exchange-rate fluctuations to pose only a minor risk as invoices are mostly issued in euros and in view of the financial instruments used.
Liquidity risk is the risk of not being able to meet existing payment obligations on time due to insufficient liquidity or exhausted credit facilities. Ensuring solvency requires maintaining sufficient liquidity resources against the backdrop of existing risks. Koenig & Bauer mainly generates funds from prepayments. In addition, the Group has had access since 2017 to a syndicated facility consisting of a guarantee and a revolving credit facility with a consortium of excellent banks. Against the backdrop of the Covid-19 pandemic and the related funding programmes implemented in response to it, Koenig & Bauer was also able to reach an agreement with Kreditanstalt für Wiederaufbau (KfW) and the syndicate banks in 2020 to increase the revolving credit facility significantly in order to safeguard its economic stability. The facility is primarily being drawn on to fund current business and a large part of the investments and to prefinance working capital. The guarantee credit facilities are required as collateral for our customers’ prepayments among other things.
We hedge liquidity risks by means of roll-over, Group-wide liquidity planning. The short-term solvency of all Group companies is tracked and controlled in a daily liquidity status. In addition to Group-wide cash management, an updated Group liquidity and finance plan is prepared complete with reports in short intervals. This roll-over planning system covers a period of twelve months. In addition, we prepare monthly cash flow statements for all consolidated Group companies for the first and second planning year as part of the annual Group planning process. No material risks are seen here as incoming and outgoing payments are monitored on an ongoing basis on the basis of budgets. As well as the syndicated credit facility, the Group-wide financing framework includes further significant bilateral credit lines as well as local guarantee facilities. Unforeseeable cash flow fluctuations in operating business can be bridged with the financial resources available.
Some of the loan agreements entered into within the Koenig & Bauer Group contain provisions that enable the creditor banks to manage credit risk. These financial covenants are customary in the market, follow corresponding standards and are structured on the basis of the current and expected future economic situation. On the basis of the current target figures, these financial covenants do not have any negative implications for Koenig & Bauer.
All in all, these risks are below the threshold indicated in the above risk matrix and are therefore not included in it.
Procurement and logistics risks
Risks in the supply chain cannot be ruled out in view of the prevailing uncertainties over the availability of materials from our suppliers, e.g. crucial electronic components such as semiconductors for controlling our printing presses, steel, aluminium and other light metals. These are currently noticeable for Koenig & Bauer in the form of long delivery times and high purchase prices.
In the absence of alternative options, short-term shortfalls in supplies may lead to production stoppages and delays in our own deliveries with negative effects on capacity utilisation and earnings. In addition to close market monitoring and extensive supply chain management, in which we monitor the quality and reliability of our key suppliers, we address the risks of disruptions to the production process by means of detailed demand planning and control processes at the Group level. In particular cases, we are currently securing the availability of parts by accumulating inventories in excess of normal levels, something which may result in increased working capital and higher costs. In the case of single-source suppliers, we pay particular attention to ensuring that back-up solutions are in place. We manufacture strategic components and critical parts ourselves or obtain them through long-term supplier relationships.
We address price risks, which are continuing to primarily arise from supply chain constraints and in the energy segment, through Group-wide category management, by bundling purchasing volumes and also by entering into long-term supply contracts. In the light of the existing supplier relationships, we otherwise do not expect any significant price increases. By working closely with our suppliers and performing regular audits, we are able to continuously improve the quality of the parts supplied. The quality and backlog rates recorded in supplier management are within the expected range.
Given the mounting deterioration of international trade relations together with protectionist tendencies, the risk of geopolitical incidents or of decoupling has steadily increased over the last few years. On the basis of a review of critical supply chains and adjustments to sourcing strategies, we will be reducing our exposure to suppliers and countries in the future and lowering the effects of possible procurement-side trade restrictions by diversifying our supply chains.
The risks with regard to energy prices and energy supply remain high. In view of these uncertainties, we adapted our energy infrastructure to the prevailing conditions in 2022 by installing mobile standby power plants to avert unforeseen fluctuations in the electricity grid and fully substituted process gas with an energy mix consisting of LPG, heating oil and district heating, among other things. In this way, our own production is largely safeguarded at all European plants even in the event of any gas shortages.
In the light of the precautions described here, we currently rate procurement risks as moderate.
Society’s growing dependence on technology and the increasing online networking of information systems increases the risk of intentional or unintentional damage to the Group through the exploitation of vulnerabilities in the IT products and systems used. The consequences of unauthorised internal and external access may include disruptions to the availability of work and production systems and supply chains, data theft, blackmail and sabotage or damage to the Koenig & Bauer Group’s image. The Covid-19 pandemic has significantly accelerated the digitisation process and stepped up innovations and changes to business models, such as online sales and service, or impacted working methods such as mobile working for the Group’s employees. This is reinforcing the need for IT security and a defence response to cyber risks. We are addressing these risks through policies and defined IT processes, compliance with common IT security standards, various lines of defence and the implementation of IT security programmes by a Group-wide Chief Information Security Officer (CISO). In addition, there is adequate insurance cover for cyber risks, including a possible interruption to business.
Following the Group-wide roll-out of the SAP ERP system, the Koenig & Bauer Group is exposed to risks with regard to the smooth phasing-out of legacy systems and the migration of business processes to the new system. To mitigate these IT risks, Koenig & Bauer utilises the services of renowned software consulting companies and has installed an SAP project group. If the legacy systems are not replaced and the ERP software is not installed on time and free of any disruptions, the resultant restrictions to operations or cost overruns for the SAP roll-out project may have considerable financial consequences. In order to reduce these risks, the rollout at the operating companies will be executed successively and on the basis of a uniform platform. In view of the successful rollout of the system at the first six companies, the experience gained from similar complex projects and the high degree of involvement of external experts, we see no discernible risks beyond the usual project risks. We consider the existing IT risks to be generally moderate.
Human resource risks
Our success depends materially on our ability to recruit and retain motivated and highly qualified engineers, specialists and executives. In the current employment market, there is a risk that we will not be able to attract and retain the necessary qualified employees and that we will be unable to assemble a suitable group of management trainees. Especially in areas requiring high travel activity, we see a risk of no longer being able to fill all the required positions with trained and experienced employees. As a result of demographic change, a growing number of highly qualified employees are reaching retirement age and leaving the Company. On the other hand, it is becoming increasingly difficult to retain suitable skilled workers and junior staff at Koenig & Bauer due to the shortage of skilled workers and the lower number of school leavers.
We are actively addressing this risk by significantly expanding vocational training at our state-approved vocational schools from the 2023 apprenticeship intake year. For more than 150 years, industrial/technical apprentices have undergone vocational training that closely interlinks theory and practice and applies state-of-the-art technology. In this context, we are increasing apprentice intake as well as the number of training courses at our locations in Radebeul and Würzburg. This also includes training for commercial and IT professions as well as dual study programmes.
Further essential building blocks for improving employee retention include a wide range of measures for improving employees’ work-life balance, e.g. mobile working, flexitime, flexible working time models such as part-time work and reduced full-time working hours, holiday care or the possibility of sabbaticals as well as other social benefits including company pension schemes, the Company’s own health insurance scheme and canteen, various mobility offers, etc. We are preparing the next generation of specialists and executives for their future tasks by means of trainee and further development programmes as well as the Koenig & Bauer Academy, which offers more than 1,000 training courses, together with long-term development plans. At the same time, we are working on our external presentation to improve the way in which we are perceived as an attractive and innovative employer. In addition, the production, service and sales companies both inside and outside Germany, have access to specialists whose growth potential is regularly reviewed.
Instruments such as working time accounts or leased employees are available to address our customers’ demand for short delivery times and also to temporarily cushion fluctuations in capacity utilisation at our factories. If our employees are unwilling to accept flexible working hours or qualified external staff are not available in peak-capacity periods, there is a risk that customer orders cannot be executed within the required period and, hence, that orders may be lost or delays experienced. Similarly, there is a risk of existing capacities generating empty costs in the event of utilization shortfalls due to missing parts. However, we can mitigate this in the short term by reducing overtime and the number of leased employees used.
In view of the precautions that have been taken and current conditions in the job market, we consider the personnel risk to be moderate.
Koenig & Bauer regularly invests substantially in the development of improved or entirely new products and processes in order to preserve its competitiveness, satisfy market requirements and gain new customers. This gives rise to risks with respect to technical implementation and feasibility as well as ultimate market acceptance of the new or revised products. In particular, there is a risk that it may not be possible for the expenses incurred to be recouped from sales of the products and services developed, thus adversely affecting the return on investment. We address the risks by means of a Group-wide stage-gate process with appropriate analyses of market requirements before development begins, continuous profitability and risk assessments during development and marketing activities in the course of the product launch. Any necessary impairments are recognised for capitalised development costs that are not considered to be recoverable. Technical risks are reduced by means of comprehensive project and quality management as well as field-testing with beta users. We currently consider the resulting risks to be moderate due to the risk-mitigation measures described above and despite the recently accelerated launch of new products and entry into new markets.
Planning, control and monitoring
Our Group targets and annual budgets are based on assumptions that are subject to uncertainties. For the purposes of sales planning, volumes with corresponding margins are defined as the basis for the companies’ capacity and resource planning. Among other things, budgets include expected increases in pay scales and the cost of materials as well as the savings achieved as a result of planned improvements. There is a risk that the assumptions underlying our plans do not fully materialise, contrary effects occur or there are delays in the implementation of the necessary measures. In addition to continuous observation and analysis of our business environment, we address this risk by regularly reviewing our budgets when preparing forecasts and by controlling our operating business efficiently together with strategic projects.
Short-term fluctuations in capacity utilisation at our plants due to volatile incoming orders may have a negative impact on profitability. Accordingly, we regularly review the necessary production capacities and coordinate them as far as possible with short-term sales planning. Furthermore, we make use of flexible working hours and leased employees to adjust our capacities dynamically in the light of the order situation.
We see a moderate risk of the assumptions underlying plans failing to eventuate in the expected form or of the savings potential factored into our budgets not being achieved in full.
Our end markets demand a high degree of innovation and bespoke solutions. Our customers’ requirements and preferences are changing all the time. For this reason, it is of decisive importance to detect technical trends and customer requirements and to align the product range, services and sales structures to these in good time. There is a moderate risk of lost revenue if customer requirements are not recognised or are not integrated in Group-wide processes early enough.
Acquisitions and alliances
Acquisitions and alliances may arise as part of our strategic development and our focus on markets of the future. The purpose of such activities and expenses is to achieve an appropriate degree of economic viability for the Group by means of a product portfolio oriented to future requirements. However, this may cause considerable acquisition and follow-up costs. For this reason, careful advance analyses are necessary and are often carried out with external support. The ensuing integration of acquisitions involves risks associated with the harmonisation of company cultures or the combination of processes and systems that may result in the loss of expertise or unplanned additional expenses. We consider the risk of such activities resulting in unforeseen costs in the performance of analyses to be moderate. This also applies to the risk of the expected positive impact on business failing to eventuate or not eventuating within the planned time period.
Poor quality, rejects and missing parts can result in production and assembly risks. A temporary increase in demand may cause delays in the delivery of individual components. A delivery delay or contractual non-compliance for which Koenig & Bauer is responsible may result in contract penalties or customer credits, thus impairing margins. We have local quality assurance departments at all plants and relevant business units. Continuous quality controls based on standardised processes systematically analyse sources of error and optimise production processes. Internal schedule management is based on regular coordination of schedules and our reporting system. Cost control and management entails periodic cost reports, which are based on our cost accounting system together with structured processes for planning, forecasting and variance analysis. To optimise the entire supply chain in order to permanently reduce delivery times, we are working on operational and strategic adjustments to the internal production network to reduce costs and lead times and to increase productivity. The scope for lowering the quality costs for our technically complex products on a sustained basis exerts considerable influence on our earnings. In the light of all the precautions that are in place, we consider exposure to production risks to be low. The risk assessment has thus improved by one category compared to last year’s report.
Infrastructure and processes risks
The risk of an interruption to our business cannot be completely excluded. Delays in production due to the failure of or disruption in individual means of production or the technical infrastructure may have adverse effects on production efficiency and leave noticeable traces on our business. We therefore regularly evaluate and audit our production sites with external support and take out appropriate property and selected business interruption insurance to cover fire, severe weather and other risks. As part of our maintenance management system, we analyse possible vulnerabilities and enhance the availability and operational safety of our machines through preventive measures. This limits unplanned outages and plant shutdowns as well as the associated costs. Overall, we consider infrastructure and process risks to be low.
Contract fulfilment risks
In the case of complex mechanical and plant engineering orders, contract fulfilment risks cannot be entirely ruled out. A failure to deliver in accordance with the contract, a delay in delivery or a breach of ancillary obligations for which Koenig & Bauer is responsible may result in a reduction in margins due to contractual penalties or concessions made to the customer. Delays for which the customer is responsible, such as the completion of print shop buildings, may have a negative impact on incoming payments and the recognition of earnings. In addition to professional project management and the ongoing optimisation of internal coordination and quality assurance processes, we address this risk by drafting the contracts appropriately. Accordingly, we consider this risk to be low.
Disasters and force majeure
Koenig & Bauer is exposed to risks arising from epidemics and pandemics, natural and environmental disasters and social unrest. Given our highly globalised and interconnected world, local disasters may have a major impact on the Koenig & Bauer Group’s business.
The worldwide restrictions resulting from the Covid-19 pandemic have had a major impact on the Koenig & Bauer Group’s business performance over the past three years. An end to the pandemic cannot be predicted despite the fact that the World Health Organization (WHO) declared at the end of January 2023 that the pandemic may be approaching a turning point. Even so, Covid-19 remains a dangerous infectious disease. In Germany, the Covid-19 vaccination currently provides protection against the risk of severe progression of the disease caused by the most widespread variants and, according to many experts, has forced the pandemic to enter an “endemic phase”. In many regions of the world, however, Covid-19 is far from being overcome and there is a risk that new variants of the virus may emerge. This may again necessitate a change in the risk assessment with regard to the health risks to the population in Germany and worldwide, together with the necessary drastic restrictions. On the basis of what is currently known, we assume that the risk associated with the Covid-19 pandemic has subsided compared to last year’s report and currently rate the risk as moderate. The risks associated with Covid-19 may occur alternatively or cumulatively to the business risks, financial risks and operational risks already reported.
Restrictions caused by Covid-19, for example, may make it difficult or impossible to generate new business, resulting in lost revenue and profit. Expected project awards are being delayed due to the postponement of investment decisions by our customers. Despite the currently high capacity utilisation of many packaging printers, customers are postponing new investments in view of the uncertainties resulting from the Covid 19 pandemic.
Likewise, pandemic-related restrictions would affect our business activities in connection with the fulfilment of existing contracts, as these also have a major impact on human resources. Staff shortages and production interruptions or supply chain disruptions may occur at our production plants, preventing customer orders from being executed on time. Travel restrictions may limit or prevent the deployment of assembly staff and service technicians for the installation of new presses or for service calls if specific countries or locations cannot be visited. In such cases, our contracts generally include appropriate clauses which exclude our liability in the event of circumstances beyond our control. Even so, there is a risk that revenue and earnings targets may be missed due to the loss of possibilities for generating revenue.
Depending on the prevailing situation with regard to the pandemic, we primarily take measures to protect our employees, customers and suppliers. The recommendations of the Robert Koch Institute and the German Foreign Office are observed in service assignments worldwide. In addition to the risk of infection, our local staff are also exposed to the risk of restrictions to their freedom of movement and behaviour. We address this by means of very carefully considered decisions on field deployment.
In connection with service and press installations, we rely on the expertise of our worldwide sales and service companies, which have their own mechanics to provide on-site service despite the international travel restrictions. Furthermore, we offer comprehensive hotline services via our “Visual Press Support” video system, remote maintenance and PressCalls to help our customers maintain maximum press availability.
Furthermore, direct damage from natural and environmental disasters such as natural hazards is covered by insurance as far as possible and economically reasonable.
Koenig & Bauer is subject to a wide range of legal and statutory regulations. The breach of contracts, licensing provisions or intellectual property rights, the negative outcome of legal disputes as well as the failure to observe regulatory requirements may cause considerable financial damage in the form of penalties, compensation payments, sanctions or reputational damage. Existing and potential legal disputes are therefore continuously tracked, analysed, evaluated to determine their legal and financial effects and taken into account in the recognition of provisions in cases in which an obligation is likely. The size of such provisions is very largely based on estimates, e.g. in the case of litigation. They are continuously reviewed in quarterly litigation reports and adjusted in good time in the event of any changes. The Group is not involved in any litigation or administrative proceedings with a material impact on its overall economic position. Generally speaking, we consider the risk of litigation and administrative proceedings having a negative impact to be low, although the exposure of globally active mechanical engineering companies to legal risks cannot generally be discarded. We address this risk by using standard contracts and by obtaining comprehensive legal advice from internal and external experts on non-standard business transactions. In addition, the established compliance management system is aimed at identifying and pre-emptively addressing legal risks at an early stage.
Damage to image
In technically demanding capital goods business there is always the latent risk of barely quantifiable harm to the Company’s image arising in the event of quality problems, breaches of industrial property rights or the like. At present, we do not see any notable risks to our image.
All in all, these risks are below the threshold indicated in the above risk matrix and are therefore not included in it.
Summary of the risk situation
As in previous years, we have already taken sufficient account of the ongoing challenging macroeconomic conditions, which are particularly reflected in supply chains constraints, global inflation with the likelihood of rising interest rates, geopolitical tensions, particularly the Ukraine-Russia war, and containment of the global Covid-19 pandemic. Given this persistently volatile environment, we now see for the first time a slight improvement in the risk situation for the Koenig & Bauer Group compared to the previous year after a long period on the basis of the risks described above.
The Group has sufficient risk-bearing capacity in the light of the current challenges and the associated risks. As things currently stand, we do not see any risks that either individually or cumulatively are liable to jeopardise the Koenig & Bauer Group’s going-concern status. Our broad-based product range, which is geared to fundamentally intact sell-side markets, the continued successful implementation of the P24x efficiency programme as well as our strong market position and financial stability are limiting risk potential.
Underpinned by our ongoing efforts to optimise risk management, risk awareness within the Koenig & Bauer Group is improving steadily. Detailed and comprehensive risk reporting improves the scope for tracking risk-mitigation precautions and for encouraging a responsible approach to opportunities and risks within the Company on a sustained basis.
This risk report is necessarily based on available information as well as expectations and estimates believed to be true at the time of reporting and refers to future trends. It is not possible to exclude other or additional risks which may have an influence of the Group but are currently not known or believed to be significant. Moreover, risks may change during the forecast period, resulting in a significant discrepancy in the estimate presented here.