Our main focus
Holland Colours’ attitude to risk is reflected in our strategic ambition. Our strategy is to stay close to our proven core technologies and products while responding to and anticipating new market trends and innovations. Chief among these is sustainability and circularity. This represents a trend, an innovation driver and a business opportunity for Holland Colours.
In terms of financial performance, we aim to grow and protect our global market share in the segments we serve and secure profitable growth year on year. This continuity is central to maintaining a sustainable base for our company’s long-term profitability. We secure profitable growth in a variety of ways, including by extending our technology base. This is driven by in-house product innovation and/or third-party partnerships.
Another aspect is to foster business opportunities in neighboring product areas and market segments. This way, we can both enter new markets and extend our knowhow in color formulations, additives and applications in ways that are effective and profitable. Here, as elsewhere, our company culture is an important driver for the successful implementation of this strategy. Holland Colours is a partly employee-owned company with direct and informal reporting lines and a strong focus on diversity. Our teamwork-based and caring culture enables us to meet client needs with technological and production capabilities that are global in terms of scale and holistic in terms of approach. Holland Colours values collective effort and teamwork, internally and with our clients.
In 2021/2022, the Board of Management paid extensive attention to assessing key risks that could impact the realization of the company’s strategic objectives. The Board assessed control measures and actions that must be taken to 1), manage these risks should they occur, and 2), to exploit the opportunities these risks could offer if they were to materialize. Working closely with the Audit Committee and the Supervisory Board, we carefully assessed our risks and developed a corporate Risk Matrix. The most important risks are summarized below, including the net risks after mitigation actions have been taken.
Our divisions, working in close cooperation with our central functions, are responsible for maintaining an effective risk and control environment as part of our day-to-day operations. The directors and controllers of our divisions have signed a statement concerning compliance with the guidelines and procedures that are the basis for financial reporting and internal audits. As a company, we also regularly evaluate our insurance cover, the premiums we pay and the policy excess that applies.
Size of current strategic segments plus competitive rivalry
Sustainability and recycling increase the reuse of polymers. This could reduce the need for color concentrates but is also an opportunity for functional additives. We closely monitor developments in our core segments and explore opportunities for innovations in other niche segments.
Overall, our global presence and strong relationships with key players in both the packaging and building & construction industries continue to drive the development of our product portfolio. To protect our technology, we apply for patents where feasible.
The risk that we lack scale or are seen as lacking scale continues to receive full management attention and we are focused on developing the right products and technologies. Our divisional sales and technology teams, in conjunction with our Chief Technology Officer along with our Innovation Manager and Global Product Market Managers, play a central role in mapping our path ahead.
We also closely track the dynamics in what is a competitive landscape. We see, for example, that global players are separating their colorants businesses, acquiring compounders or teaming up with others. And in North America in particular, we see some trends towards concentration in our client base.
These trends present both challenges and opportunities for smaller players like us that have a global reach serving niche markets based on a service-oriented approach. For instance, there is a trend towards the standardization of technology and machinery among convertors in the packaging industry. Brand owners in this segment are also having a growing impact. As these are global trends, we manage this segment of our business on a global basis where it relates to strategy and product innovation.
One of the risks of being a relatively small player with a global reach is that we could end up stretching our resources too thinly over the globe, while at the same time failing to be effective in local markets. Given this, we use different go-to-market models to spread our risk and we remain closely connected to local developments. In the North American region, we work with local sales offices.
In EMEIA and Asia, we have dedicated sales representatives in the various countries, in some cases combined with dedicated distributors. For efficiency reasons, our product supply remains predominantly regional. From time to time, we evaluate the efficiency of the model and its elements and make changes where needed.
Cybercrime risk is increasing and becoming more severe. We regularly train personnel with respect to cybercrime. We also perform penetration tests through an external partner on a regular basis. We have insurance coverage for cybercrime.
This covers the risk that the company and our employees will be unable to adapt rapidly and cost efficiently to changes in the business environment. The ongoing investment in digitalization and new software will increase performance levels, professional behavior and process orientation.
These risks refer to insufficient knowhow and the measures we have in place to properly manage ever-changing local and international compliance requirements.
Laws and regulations
Without an internal control department or compliance department, there is no independent body to control the business and fraud risks. Employees are co-owners of the company and as such responsible behavior can be expected from them. Nonetheless, our Code of Conduct needs to be actively monitored and communicated.
In our risk assessment processes, we focus on strictly managing the introduction of new raw materials and on product and production compliance. In the packaging segment, we are subject to audits and reviews by our clients, which helps to keep us close to and aligned with their requirements, and to comply with international regulations related to the use and application of materials.
From a preventative perspective, we partner closely with our key clients to interpret new regulations. We achieve this by reformulating products and/or changing our internal operations where needed. The latter may also be prompted by client audits (mainly in packaging). All our manufacturing sites are ISO-registered and subject to regular audits, including, since this year, our site in Richmond, Indiana, as well.
When it comes to incidents, we take a similarly structured approach to learning from them. Our complaints registration and handling system has achieved outstanding scores for its structure and content in multiple ISO audits.
Complaints are discussed promptly by a Quality Assurance team consisting of Sales, Operations, Technical and Quality Management, with follow-up on the elimination of root causes. Product compliance and complaints management are an agenda item at divisional management team meetings, while product liability risk is covered in the agreements with clients and suppliers and insured through third parties.
We work in different areas with different cultures. We also work with agents and distributors. We want not only our employees but also our business partners to show responsible and compliant behavior. The five core values (Accountability, Pro-activeness, Competence, Responsibility and Teamwork) of Holland Colours and our Code of Conduct provide a strong basis for the culture of the company. In order to manage our risk exposure we will introduce an Ethical Compass in 2022/2023.
The risk that we do not have enough cash to pay our employees and suppliers. Holland Colours is debt free and has positive operational cash flows.
Other financial (currency, interest rates, capital structure)
The risk posed by currency exchange fluctuations. We do business in USD, IDR, GBP, EUR, CNY, MXN, CAD and HUF. We have both revenues and expenses in all currencies, so some natural hedges are in place. We monitor net effect on a continuous basis. Further, this is an acceptable risk.
Holland Colours continuously monitors elements that could jeopardize our financial health. The risks that are part of our regular business operations (such as currency and credit risks) are listed in the Financial Risk Management section of the Financial Statements. The financial risks related to the funding of the company are limited. We are debt-free with a standby credit line for ad hoc needs.
Health and safety risks are inherent to our operation given that we are a company with manufacturing processes and laboratories, significant many manual work and manual internal logistics. We work according to a Safety Ladder concept that addresses all aspects related to safe behavior. The Safety Ladder methodology has been introduced globally, although it is still less well known outside Europe. Local practices and regulations also form part of our safety programs. The Board of Management is informed within 24 hours about L1 and L2 incidents. Learnings from near misses are shared between the divisions. Information about a healthy lifestyle and good ergonomics are shared with employees and we have programs in place that contribute to the well-being of our employees. Continued training in health, safety and, in particular, awareness and behavior are in place.
Any inability to secure raw materials on time disrupts our production process and means we cannot supply our clients. Our multiple sourcing strategy reduces this risk significantly.
This is the risk that our IP is used by our competitors. Our IP is registered. The recipes are protected by means of a good IT infrastructure and recipes are difficult to produce in production environments that are not part of Holland Colours.
Our workforce is aging. In western countries (sites in Europe and USA), labor markets are tight. There are fewer people interested in and/or available for jobs in operations. We are paying increased attention to ergonomics and investing in training and automation to make these jobs more attractive.
Quality control reduces the risk that our products will be recalled due to production errors. Holland Colours has a fully-fledged stewardship department which ensures adherence to international standards and regulations regarding the use of raw materials for defined applications (e.g. food contact).
We have incorporated the scale-up phase as an integral part of projects that relate to new product innovation. All global projects are subject to extensive review by our Chief Technology Officer and subsequent approval by the Board of Management. Special attention is paid to staffing and other needs during the scale-up phase. Market launch is prepared under the direct supervision of the Head of Global Marketing during the final phase of a product development project. Coordination between the project leader and Global Marketing begins early, during the test marketing stage.
Global economy and politics
We have a large geographical footprint and we operate in a lot of areas that are not politically stable. The political situation in a country or region could influence the business or project management (especially given the high number we currently have running).
We monitor the risks and act upon them. It is highly unlikely that political and economic risks will happen in many different regions at the same time.
Export sales to Russia, Belarus and Ukraine represent less than 4% of total Holland Colours Group revenue. This revenue is now at risk because of the armed conflict in the region. As a result, we changed our policy related to doing business in the region and communicated this shortly after the outbreak of the armed conflict. We halted all business developments but decided that we are willing to continue to supply existing products to existing customers under the prevailing EU sanctions. The company will continue to monitor the situation closely.
Process and product
We have established ambitious goals for 2030. The risk is that we experience delays in achieving these goals. We have made sustainability an integral part of our strategy and this topic is high on our agenda with a roadmap being put in place. The divisions are developing concrete actions and we are in the process of hiring a sustainability manager.
The risk of the possibility of the company being subject to fraudulent activity. The company identified, among others, the following areas:
We have a process in place for authorizing product pricing. There is no formal control in place regarding adherence to the procedure. However, it is under control because of the regular analyses we run of our margins during end-of-month procedures.
We have an initial draft and the company will finalize the matrix in the coming financial year.
Gifts from and to relations
Our Code of Conduct includes rules related to these gifts. In general, any potential gifts from suppliers or business partners (especially those received around Christmas) are collected centrally and distributed among all employees.
In some markets, Holland Colours works with distributors or agents. Two years ago, all Holland Colours agents signed the Code of Conduct that applies to them. For new agents, this Code of Conduct is an integral part of their contract. Every year, we will evaluate and register whether a controversial situation has occurred in the context of the Code of Conduct, and how it has been dealt with. All Holland Colours distributors have received the Code of Conduct and an accompanying letter in which we ask them to act in accordance with it.