Teleste’s risk management policy defines the objective of risk management as the achievement of strategic objectives. The principles and objectives of the Group’s risk management are subject to approval by Teleste’s Board of Directors. Risk management aims to ensure the achievement of business goals, so that any material risks affecting business operations and posing a threat to the achievement of goals are identified and continuously monitored and evaluated. The company has risk management methods in place to prevent the materialisation of risks. In addition, insurance is used to cover financial risks and other risks that are reasonably insurable. Regular, cost-efficient evaluation and management of risks are emphasised in Teleste’s risk management policy. Risk management supports the business operations and generates added value that promotes decision-making and goal-setting by the management in charge of business operations. Monthly reporting constitutes part of the internal control and risk management system. In particular, it is used for the monitoring of the development of orders received, order backlog, deliveries, net sales, profitability, trade receivables, working capital and cash flow and, consequently, the development of Teleste Group’s performance. The Board of Directors annually reviews essential business risks and their management. Risk management constitutes an integral part of the strategic and operational activities of the business units and Group functions. Risks are reported to the Board on a regular basis.
Teleste’s risk management system covers the following risk categories:
- strategic risks
- operational risks
- financial risks
- hazard risks
For each identified risk, the Management Group confirms a risk owner who is responsible for risk assessment, selecting the risk management strategy, planning risk management actions and assigning responsibilities for them, and risk monitoring.
Teleste ́s Board of Directors has updated the company ́s risk factors in the financial statement release 9 February, 2023.
The most significant business risks
Teleste is exposed to risks that may be due to the company’s operational activities or changes in the business environment. The risk factors described below may have an adverse effect on Teleste’s business operations or financial position. However, other risks that Teleste is currently not aware of, or which are currently not estimated to be significant, may also become significant in the future.
The Board of Directors reviews essential business risks and their management on quarterly basis and always when needed. Risk management constitutes an integral part of the strategic and operational activities of the business areas. Risks are reported to the Audit Committee and the Board of Directors on a regular basis.
Economic cycles and, in particular, fluctuations in the level of investment activity among broadband network operators and public transport operators affect the demand for Teleste’s products and services. High inflation and rising interest rates also affect Teleste’s customers’ financing, profitability, ability to make investments and, consequently, the demand for Teleste’s products and services.
The company must strive to anticipate changes in the market and react to them. Periods of technological transformation, such as data communications operators migrating to next-generation technologies in access networks, may significantly change the competitive positions of the current suppliers and attract new competitors to the market. Increasing competition may also lead to intensifying price competition, which may affect the profitability of the business.
Correct technology choices, product development investments and their timing are vital to success. Product development involves calculated risks and should they materialise, the value of the product development investments can decrease.
Expanding business operations to new markets is demanding and involves risks. The Group’s investments in growth in the North American market will not necessarily lead to the desired results.
The largest key customers represent a significant share of the net sales of the customer segment in question. Potential changes in procurement strategy or supplier selection by customers may lead to a contraction of business volumes and declining profitability.
Consolidation is possible in the company’s operating industries among both customers and suppliers, which may weaken Teleste’s competitive position.
In addition to the level of market demand, the competitiveness of Teleste’s product and service offering is a key factor with regard to growth and profitability. Failure to anticipate or respond to changes in customer requirements, competitors’ offerings or changes in business models may lead to a deterioration of Teleste’s competitiveness.
Shortages of materials and components have caused delivery delays and additional costs over the past two financial periods, reducing company’s profitability. The problems associated with the availability of materials are expected to remain significant, leading to delivery risks in spite of the forward-looking purchasing of materials for the company’s inventory. The duration of the problems associated with the availability of materials is difficult to estimate, but it is expected that the impacts will continue in 2023. High inventory levels may lead to the impairment of raw materials and components.
In the technology and product business, client-specific and integrated deliveries of solutions create favourable conditions for growth, even if the involved resource allocation and technical implementation pose a challenge and therefore also involve risks. End-to-end deliveries of systems and projects may be large in size and take place over several years, setting high demands for the project quotation calculation and management and, consequently, involve risks.
Various technologies are used in Teleste’s products and solutions, and the intellectual property rights associated with the application of these technologies can be interpreted in different ways by different parties. Such difficulties of interpretation may lead to costly investigations or court proceedings.
Customers have very demanding requirements for the performance of products, their durability in challenging conditions and their compatibility with other components of integrated systems. Regardless of careful planning and quality assurance, complex products and solutions may fail in the customer’s operational environment and lead to expensive repair obligations.
High inflation, rising interest rates and supply chain disruptions have weakened the global economic outlook, presenting risks to the company’s operations and profitability. Teleste aims to mitigate these risks through more dynamic pricing and contract models, and by taking continuous measures to improve productivity and reduce costs. Many competitors in the provision of access network technologies come from the United States, which is why the exchange rate of the euro against the US dollar has an effect on Teleste’s competitiveness.
Some of the company’s projects in the public transport segment are fixed-price projects due to the nature of the industry, which means they involve a margin risk when costs increase. Some project deliveries also involve delays in deliveries, which may lead to contractual penalties or credit losses. The company negotiates the effects of contractual terms concerning delays in project deliveries separately for each project.
Several information systems are critical to the development, manufacture and supply of products to customers. The maintenance of information systems and deployment of new systems involve risks that may affect the ability to deliver products and services.
Competent employees with the necessary qualifications and skills play a key role in the achievement of Teleste’s objectives. The development of personnel competence, employee engagement and recruitment involves risks that influence how competitiveness is maintained and developed. Instability in the labour market may have a negative impact on the company’s competitiveness, and labour action in export logistics, for example, may interrupt deliveries to customers.
Negative impacts on the company’s brand and reputation could affect Teleste’s business and financial performance. Potential reputational damage could arise due to significant problems related to deliveries, products or service quality, or a cyber security incident, for example.
Risks related to unexpected events and security
Physical damage caused by accidents (such as fire), extreme weather events, natural disasters, terrorism or other exceptional circumstances may disrupt the availability of raw materials or components, or interrupt the company’s own manufacturing operations.
The ongoing COVID-19 pandemic continues to present risks to Teleste’s supply chains. Disruptions in the supply chains of electronic components and raw materials may continue to have a negative effect Teleste’s delivery capability. A potential new pandemic or mutations could lead to new and more extensive restrictions.
Information systems may also be exposed to external cyber security threats, and we strive to protect ourselves from these threats through technical solutions and by increasing the security competence of our personnel. Increased geopolitical tensions, such as those related to the war in Ukraine, have increased the likelihood of cyber attacks. Such attacks can cause local and global digital disruptions that have an adverse impact on the activities of Teleste or its customers or suppliers.
Teleste Group may also be targeted by illegal activities and fraud attempts that could have a significant effect on the financial result. The Group strives to minimise these risks by continuing to develop good governance practices and increasing the security competence of its personnel.
Data leaks involving sensitive employee or customer data may lead to reputational damage or significant financial repercussions. A data leak could be caused by, for example, cyber crime, ransomware, data theft, fraud, misconduct or inadvertent mistakes by our employees.
Customs levies imposed by different countries and changes or restrictions on exports or imports may have a negative effect on the supply chains of raw materials and components and the profitability of products.
Teleste decided to suspend deliveries to Russia and Belarus immediately after the start of Russia’s war of aggression. While the direct impacts of the war in Ukraine on Teleste’s business have been limited, the war does have a significant impact on the availability of certain raw materials, logistics costs and the delivery times of materials.
Disruptions in the availability of materials and higher purchasing prices have significantly increased inventories and the risk of write-downs of inventories. The increase in working capital has reduced the financial reserves available to the company. Problems with the availability of raw materials and components may continue to complicate manufacturing operations and cause delays in deliveries, leading to increased working capital and a higher liquidity risk for the company.
Rising interest rates affect Teleste’s financial expenses to the extent that interest-bearing liabilities have not been hedged.
Part of Teleste’s net sales and a significant proportion of raw material and component purchases are denominated in currencies other than the euro. Significant exchange rate fluctuations expose Teleste to currency risks. In particular, the development of the exchange rates of the US dollar and the Chinese renminbi against the euro influences product costs and result. The company hedges against short-term currency exposure by means of forward exchange contracts and options.
Teleste is exposed to risks related to its customers’ liquidity and payment behaviour, which may affect Teleste’s cash flow or lead to credit losses. Significant changes in the financial or tax regulations of different countries, or changes in the interpretation of such regulations, may also have an impact on Teleste’s financial performance, liquidity or cash flow.
More detailed information on financial risks is published in the notes to the financial statements 2022.
Teleste’s Belgian subsidiary has received a tax reassessment decision for the tax year 2019, and the company has appealed the decision. The company has recognised the tax effect of the tax reassessment decision, totalling EUR 1.7 million, in its result for the second quarter. If the appeal is not approved, the tax reassessment decision would lead to a tax payment of EUR 2.1 million, which would affect the company’s cash flow at the time of payment.
Legal proceedings and judicial procedures
Aside from the tax reassessment decision issued in Belgium, there were no other legal proceedings or judicial procedures pending during the period under review that would have had any essential significance for the Group’s operations.